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### Importance, purpose, and revision drivers
- Measurement of external positions central to IMF operations: surveillance and provision of financial assistance.
- Manual serves as international standard for concepts, definitions, classifications, and conventions.
- Primary purposes:
  - (i) to provide standards for concepts, definitions, classifications, and conventions;
  - (ii) to facilitate the systematic national and international collection, organization, and comparability of balance of payments and international investment position statistics.
- Revision motivated by developments since the fourth edition (1977): liberalization of financial markets; innovations in financial instruments; new approaches to restructuring external debt; unprecedented growth in international trade in services.
- Revision objectives:
  - Harmonize with the System of National Accounts 1993 and IMF methodologies for money and banking and government finance statistics.
  - Expand scope to include international investment position statistics and link stocks with period changes (transactions, valuation changes, other adjustments).

### Conceptual framework and key definitions
- Balance of payments: statistical statement summarizing economic transactions of an economy with the rest of the world for a specific time period.
- Transaction: economic flow reflecting creation, transformation, exchange, transfer, or extinction of economic value involving changes in ownership of goods and/or financial assets, provision of services, or provision of labor and capital.
- International investment position (IIP): statistical statement at a specified date of (i) value and composition of stock of an economy’s financial assets (claims on the rest of the world) and (ii) stock of an economy’s liabilities to the rest of the world. Changes attributed to transactions, valuation changes (exchange rates, prices), or other adjustments (e.g., uncompensated seizures).
- Double-entry system: every recorded transaction represented by two equal entries (credit positive, debit negative). Net errors and omissions shown when accounts do not balance.
- Residence and economic territory concepts identical to SNA; center of economic interest is the residence criterion with a one-year guideline (not inflexible).

### Structure and classification of accounts
- Two main groups:
  - Current account: goods and services, income, and current transfers.
  - Capital and financial account: capital transfers and acquisition/disposal of nonproduced, nonfinancial assets; financial account covering direct investment, portfolio investment, other investment, reserve assets.
- Change introduced: former capital account redesignated capital and financial account; current account redefined to exclude capital transfers.
- Financial account classification hierarchical by:
  - Functional categories (direct investment, portfolio investment, other investment, reserve assets).
  - Asset/liability distinction.
  - Instrument specification.
  - Sectorization (monetary authorities, general government, banks, other sectors).
  - Distinction between long- and short-term instruments (retained for other investment).
- Current account recording: gross recording principle emphasized for most items; most financial account components recorded net.

### Goods, services, income, and transfers (current-account detail)
- Goods:
  - General merchandise; goods for processing (included on a gross basis as exception to change of ownership); repairs on goods (valued at repair fees); goods procured in ports by carriers; nonmonetary gold (subdivided when feasible into 5.1 Held as a store of value and 5.2 Other).
  - Valuation principle: market value at customs frontier of exporting economy — goods valued f.o.b. at that frontier.
  - Recording convention: exporter records change when exporter ceases to carry goods on books; importer when importer records goods as real asset.
- Services disaggregation includes (selected): Transportation (sea, air, other), Travel (business and personal), Communications services, Construction services, Insurance services, Financial services, Computer and information services, Royalties and license fees (Paragraphs 165–168), Other business services, Personal, cultural, and recreational services, Government services n.i.e.
- Income:
  - Compensation of employees: wages, salaries, and other benefits.
  - Investment income: direct investment income (income on equity: dividends, branch profits, reinvested earnings; income on debt: interest), portfolio investment income (equity and debt), other investment income (interest on loans, deposits, creditor position in the Fund, SDR holdings).
  - Timing: interest on accrual basis; dividends as of dates payable; reinvested earnings recorded when earned.
- Transfers:
  - Distinction between current and capital transfers per SNA concordance.
  - Capital transfers: transfer of ownership of fixed assets; forgiveness of liabilities when no counterpart is received; transfers linked to acquisition/disposal of fixed assets (investment grants).
  - Current transfers: all transfers not capital; classified by sector into general government and other sectors; includes workers’ remittances (listed as a standard component 2.1).

### Valuation and time of recording
- Market price recommended for transactions and stocks; where market price absent, use market price equivalents or donor-assigned values when donor and recipient differ.
- Accrual principle governs time of recording: when economic value is created, transformed, exchanged, transferred, or extinguished; claims/liabilities arise with change in ownership (legal, physical, or economic).
- Goods timing exceptions: financial leases, shipments between parent and affiliate, goods for processing — conventions provided to impute change of ownership.
- Conversion: use market rates prevailing on transaction dates or midpoints between buying and selling rates; for stocks use market exchange rates on balance-sheet date (midpoint). Multiple official rates and parallel market rates have prescribed treatments and unitary/principal-rate options (paragraphs 134–138).

### Financial account: scope, net recording, and classifications
- Financial account records transactions associated with changes of ownership in foreign financial assets and liabilities.
- Net recording favored for most financial-account components: net increases/decreases consolidated in single net entries; gross presentations used as supplementary information.
- Functional types:
  - Direct investment: directional basis; equity capital, reinvested earnings, other capital (intercompany debt). Direct investment transactions often shown with separate asset/liability entries and income shown net by direction.
  - Portfolio investment: equity securities and debt securities (bonds and notes, money market instruments, financial derivatives). Coverage expanded to include new instruments; maturity distinction de-emphasized.
  - Other investment: trade credits, loans (including use of Fund credit), currency and deposits, other assets/liabilities; subdivided by instrument and sector and by original contractual maturity (long-term > one year; short-term ≤ one year) for other investment.
  - Reserve assets: monetary gold, SDRs, reserve position in the Fund, foreign exchange (currency and deposits, securities), other claims — defined as assets readily available to and controlled by monetary authorities.
- Sector attribution: monetary authorities, general government, banks, other sectors — creditor sector for assets, debtor sector for liabilities.
- Reclassification and exceptions:
  - Reclassifications (e.g., from portfolio investment to direct investment when 10 percent threshold met) affect IIP but are not transactions in BOP.

### Portfolio and other financial instruments, derivatives, and recent coverage changes
- Portfolio investment instruments include equity securities and debt securities (bonds and notes; money market instruments; financial derivatives when generating claims/liabilities).
- Debt securities examples: convertible bonds, zero coupon and deep discounted bonds, floating rate bonds, indexed bonds, asset-backed securities.
- Money market instruments: treasury bills, commercial paper, bankers’ acceptances, negotiable certificates of deposit with original maturities ≤ one year; repurchase agreements classified under loans in other investment.
- Derivatives treated as separate financial transactions when tradable and with market value; valuation at market prices for transactions.
- Specific instrument treatments:
  - Zero coupon/deep discounted bonds: difference between issue price and maturity value treated as interest accruing over life.
  - Options/warrants: premiums treated as acquisition of financial asset (or split into service if identifiable); exercise recorded as acquisition/sale of underlying asset at market price.
  - Swaps: streams of interest recorded net in current account; principal streams recorded in financial account.
  - FRAs: settlement recorded as interest income; no financial account entry if no underlying asset exchanged.

### Direct investment specifics and reinvested earnings
- Direct investment concept: lasting interest and significant influence; 10 percent equity threshold guideline (flexible).
- Components: equity capital, reinvested earnings, other capital (intercompany debt).
- Reinvested earnings:
  - Investor’s share of earnings not distributed; if not separately identified, branch earnings conventionally considered distributed.
  - Recorded in current account as direct investment income (income on equity) and in financial account as reinvested earnings (direct investment capital) — offsetting entries increase foreign assets/liabilities.
- Other direct investment capital: intercompany debt; no formal long-/short-term maturity distinction.
- Special cases: SPEs included if meeting criteria; transactions of affiliated banks limited to equity and permanent debt capital.

### International Investment Position (IIP): structure, valuation, and reconciliation
- IIP defined as stocks of claims on nonresidents, liabilities to nonresidents, monetary gold, and SDRs; net IIP plus nonfinancial assets equals net worth.
- Classification dimensions: assets vs liabilities; functional categories consistent with financial account (direct, portfolio, other, reserve assets).
- Changes in IIP columns: transactions, price changes, exchange-rate changes, other adjustments (e.g., allocation/cancellation of SDRs; monetization/demonetization of gold; reclassifications).
- Valuation principle: market prices at reference dates. Practical departures occur, especially for direct investment where enterprise balance-sheet book values often used.
- Guidance on debt valuation: debt traded at discounts should be valued at secondary market quotations; asymmetries noted between creditor and debtor valuations.
- Relationship to external debt: nonequity components of liabilities often viewed as gross external debt per prior joint studies.

### Transfers, capital transfers, and migrants’ transfers
- Transfers recorded even when no quid pro quo; distinction between current and capital transfers aligned with SNA.
- Capital transfers include debt forgiveness, investment grants, acquisition/disposal of nonproduced, nonfinancial assets (e.g., land and subsoil assets).
- Migrants’ transfers equal migrants’ net worth; household effects moved recorded under goods-general merchandise; practical limitations in compiling full migrant net worth acknowledged.
- Valuation: use market values or donor-assigned values when donor/recipient differ; timing per accrual or when underlying resources change ownership.

### Exceptional financing, liabilities constituting foreign authorities’ reserves (LCFARs), and analytic presentations
- LCFARs no longer identified as standard financial-account components; encouraged as supplementary information by instrument and sector.
- Exceptional financing defined analytically as arrangements to meet balance of payments needs (debt forgiveness, intergovernmental grants, direct investment related to debt reduction, borrowing by authorities, rescheduling, accumulation/repayment/cancellation of arrears).
- Standard vs analytic (below-the-line) presentations:
  - Standard presentation records transactions above the line with net errors and omissions as balancing item.
  - Analytic presentations (e.g., IMF aggregated table) show exceptional financing below the line to identify financing used to accommodate balance of payments needs; creditor countries have symmetrical entries with no below-the-line entries for creditors.
- Accounting treatments (selected):
  - Arrears: recorded as if amounts had been paid with offsetting new short-term liability entries; analytic presentation records arrears arising from balance of payments difficulties below the line.
  - Debt forgiveness: debtor records credit as capital transfers and debit to reduction of liability; analytic treatment may show forgiveness below the line depending on timing/arrears.
  - Debt/bond swaps and debt/equity swaps: recorded at market prices; valuation guidance and two-step modalities for debt/equity swaps provided.
  - Borrowing for BOP support and new money facilities: analytic below-the-line entries for drawings used to meet BOP needs.
  - Rescheduling/refinancing: entries depend on whether obligations are in arrears, due in current period, or not due; analytic below-the-line treatment applies when linked to BOP needs.
- Appendix IV provides tabulated standard and analytic entries for selected exceptional financing transactions.

### Regional allocation and bilateral statements
- Regional allocation principles:
  - Debtor/creditor principle: allocate changes in financial claims to country of residence of nonresident debtor; liabilities to country of residence of nonresident creditor (preferred for IIP).
  - Transactor principle: allocate to country of residence of nonresident transactor; useful for analysis of resident activity and financial centers.
- Problems: securities markets and intermediaries complicate debtor/creditor allocations; monetary gold and SDRs not attributable by debtor/creditor principle.
- Regional compilations important for analysis of payments imbalances and economic/monetary integration.

### Policy analysis, financing, and adjustment implications
- Core identities:
  - GDP = C + G + I + X–M.
  - CAB = X – M + NY + NCT.
  - GNDY = C + G + I + CAB.
  - GNDY – C – G = S.
  - S = I + CAB.
  - S – I = CAB.
  - S – I + NKT – NPNNA = CAB + NKT–NPNNA = NFI (where NKT – NPNNA = balance on the capital account).
- Financing dynamics:
  - A current account deficit must be financed by increases in liabilities to nonresidents and/or reductions in claims on nonresidents, affecting future net investment income and possibly destabilizing if not sustainable.
  - Sources of financing include direct investment, bank loans, bond issues, portfolio inflows, and reserve asset drawdowns.
  - Limits exist on reserve use; sustained deficits require adjustment measures.
- Adjustment instruments:
  - Exchange rate depreciation can improve competitiveness but should be supported by restrictive monetary and fiscal policies to reduce domestic absorption.
  - Fiscal consolidation should avoid undermining long-run supply potential; recommended actions include reducing subsidies to inefficient enterprises and cutting government activities better performed by private sector.
  - Monetary policy should aim for positive real interest rates and avoid offsetting reserve losses with domestic base expansion that prevents built-in adjustment.
- Surplus considerations:
  - Persistent surpluses can cause distortions (e.g., “Dutch disease”); excessive reserve accumulation may be inefficient if beyond short-run needs.
  - Identify and remove distortionary policies that deliberately target surpluses; evaluate whether private or government saving is excessively high or domestic investment too low.

*Source: Foreword; Preface; Chapters I, IV, VI, VIII, IX, X, XI, XIV, XVI, XVIII, XXI, XXII, XXIII; Appendices I, II, III, IV, V — Balance of Payments Manual (1993 edition).*

### Foreword    ix

### Foreword

### Importance and purposes
- Measurement of external positions has been a central feature of IMF operations since inception, conducted in the dual context of surveillance of countries’ economic policies and provision of financial assistance in support of adjustment measures to correct balance of payments disequilibria.
- The Fund has a compelling interest in developing and promulgating appropriate international guidelines for the compilation of sound and timely balance of payments statistics.
- Timely, reliable, and comprehensive balance of payments statistics based on an appropriate and analytically oriented methodology are described as an indispensable tool for economic analysis and policy making.
- With growing interdependence of world economies and movement toward greater liberalization and integration of markets, the need for such statistics has increased over time.

### Historical context and drivers of revision
- Successive editions of the Balance of Payments Manual have embodied evolving guidelines; the first edition was published in 1948.
- Important changes since the fourth edition (published in 1977) motivated a revision, including:
  - Liberalization of financial markets.
  - Innovations in the creation and packaging of financial instruments.
  - New approaches to restructuring of external debt.
  - Unprecedented growth in the volume of international trade in services.
- The revision aimed to harmonize concepts, to the maximum extent possible, with the System of National Accounts 1993 and with IMF methodologies for money and banking and government finance statistics.

### Major conceptual and structural changes in the fifth edition
- The fifth edition addresses, for the first time, international investment position statistics and explicitly links stocks of external financial assets and liabilities with corresponding period changes (transactions, valuation changes, other adjustments).
- The current account is redefined to exclude capital transfers, which are included in an expanded and renamed capital and financial account—providing greater harmonization and integration with the SNA.
- Clear distinctions are made within the current account among goods, services, income, and current transfers.
- Considerable disaggregation is introduced in the classification of international services transactions, reflecting heightened analytical and policy interest (e.g., in the context of General Agreement on Tariffs and Trade negotiations on services).
- The financial account classification adopts a hierarchical structure covering:
  - Functional categories.
  - Asset or liability distinctions.
  - Instrument specification.
  - Sectorization.
  - Distinction between long- and short-term instruments.
- Income components of the current and financial accounts and the international investment position are closely aligned to enhance analytic potential.
- Despite extensive revisions, the Manual maintains a high degree of continuity with earlier editions; compilers reasonably conforming to previous standards should not experience great difficulty adapting.

### Guidance and recommendations
- The Managing Director urges compilers and users around the world to adopt the conceptual guidelines of the fifth edition as the basis for compiling balance of payments and international investment position statistics and for reporting this information to the Fund.
- The Manual provides international guidelines for compiling an articulated set of international accounts encompassing measurement of external transactions (balance of payments) and the stock of external financial assets and liabilities (international investment position).

### Preparation, contributors, and consultation process
- The revised Manual was prepared by the IMF Statistics Department in close consultation with balance of payments experts in member countries and international and regional organizations.
- Drafting and revision highlights:
  - Primary drafting and subsequent redrafting were conducted largely by Mr. Jack Bame (consultant; formerly associate director for international economics at the Bureau of Economic Analysis, U.S. Department of Commerce).
  - Project supervised by Mr. Mahinder S. Gill, assistant director for the Balance of Payments and External Debt Division, IMF Statistics Department.
  - Specific chapter and appendix contributions by IMF staff, including Mr. Gill (Chapter 3 and Appendix 1), Mr. Jan Bové and Mrs. Florencia Frantischek (Appendix 4), Mr. Abul Siddique (Appendix 3), and Mr. Peter Clark (Appendix V).
  - Editing and production coordination by Ms. Nancy Basham and typing by Ms. Suzanna Persaud.
- The revision process drew on reports of IMF working parties on the Statistical Discrepancy in World Current Account Balances and on the Measurement of International Capital Flows, and on conclusions reached at a meeting of balance of payments experts held at IMF headquarters in March 1992.
- The IMF acknowledges substantial contributions from experts who participated in the March 1992 meeting and from national balance of payments offices and representatives of regional and international organizations (a list of participating countries and organizations appears in the Preface).

### Endorsement
- Michel Camdessus, Managing Director, International Monetary Fund, introduces and commends the fifth edition and urges its adoption by member countries.

*Source: Foreword, Balance of Payments Manual, fifth edition*

### PREFACE

### PREFACE

### Purposes of the Balance of Payments Manual
- This 1993 edition of the Balance of Payments Manual (the Manual) serves as an international standard for the conceptual framework underlying balance of payments statistics, paralleling editions issued in 1948, 1950, 1961, and 1977.
- Primary purposes:
  - (i) to provide standards for concepts, definitions, classifications, and conventions;
  - (ii) to facilitate the systematic national and international collection, organization, and comparability of balance of payments and international investment position statistics.
- A companion volume, the Balance of Payments Compilation Guide (the Guide), provides practical guidance to national compilers on collection, presentation, and systematization of external statistics.

### Changes from the Fourth Edition
- The Manual’s scope and orientation differ from the fourth edition in several respects:
  - Expansion of the conceptual framework to encompass balance of payments flows (transactions) and stocks of external financial assets and liabilities (the international investment position).
  - Clear distinction between (i) transactions and (ii) other changes in the accounts—valuation, reclassification, and other adjustments. Only transactions are reflected in balance of payments accounts.
    - Examples: allocation or cancellation of special drawing rights (SDRs) and monetization/demonetization of gold are treated as adjustment items affecting the international investment position, not as balance of payments transactions.
  - Strengthened and harmonized linkage of the international investment position and balance of payments accounts to the rest of the world account in the System of National Accounts (SNA), including identical treatments of residence, valuation, timing, and reinvested earnings on direct investment.
  - Introduction of a distinction between current and capital transfers; the former balance of payments capital account is redesignated as the capital and financial account.
- Changes in component treatments:
  - Current account distinguishes international transactions in services from transactions in income; income components separately identified as compensation of employees and investment income, harmonizing with SNA 1993.
  - Expanded component list of transactions in services.
- Financial flows and stocks coverage expanded and restructured:
  - Orientation towards compatibility with other IMF statistical systems and the SNA.
  - Response to developments since 1977: financial innovations, new instruments, asset securitization, blurred long-/short-term distinctions, and more complex resident/nonresident identification.
  - Classification of the financial account re-oriented; coverage of nonequity portfolio investment broadened to include long- and short-term securities.
  - Introduction of supplementary classifications covering exceptional financing transactions (with selected arrears-related entries for balance of payments accounts) and other analytical items.

### Uses of Balance of Payments and International Investment Position Data
- Primary uses:
  - National and international policy formulation (payments imbalances, inward/outward foreign investment).
  - Analytical studies: causes of payments imbalances; necessity for adjustment measures; relationships between merchandise trade and direct investment; international trade in services; international banking flows and stocks; asset securitization and market developments; external debt problems; income payments and growth; links between exchange rates and current account and financial account flows.
  - Balance of payments projections and relationships to changes in stocks of external assets and liabilities.
  - Compilation of national accounts components (production accounts, income accounts, capital and financial accounts, measurement of national wealth).

### Additional Modifications and Presentation
- The list of differences from the fourth edition is not exhaustive; specific component treatments are covered in appropriate chapters (examples: direct investment criteria for flows between affiliated banks; distinction between long- and short-term intercompany transactions).
- Regional presentation elevated from an appendix in the fourth edition to a chapter.
- New chapter on the international investment position explains classification, components, and links to balance of payments accounts and SNA balance sheet aspects.
- Selected issues in balance of payments analysis moved to Appendix 5; analytic material is limited in the Manual and will be treated more fully elsewhere.
- The Manual preserves continuity of the data collection framework and IMF reports while delineating principles and concepts clearly and providing flexibility for countries at different stages of statistical system development.

### Structure of the Manual
- Part one: conceptual framework of international accounts.
- Part two: structure and classification of accounts.
- Part three: regional allocation.

### CHAPTER I — Definitions and Conceptual Framework (selected highlights)
- Balance of payments definition:
  - A statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions are, for the most part, between residents and nonresidents and involve goods, services, income, financial claims and liabilities, and transfers.
  - Transaction defined as an economic flow reflecting creation, transformation, exchange, transfer, or extinction of economic value involving changes in ownership of goods and/or financial assets, provision of services, or provision of labor and capital.
- International investment position:
  - Compiled at a specified date (such as year end), it is a statistical statement of (i) the value and composition of the stock of an economy’s financial assets (claims on the rest of the world) and (ii) the value and composition of the stock of an economy’s liabilities to the rest of the world.
  - Changes in stocks during a period can be attributable to transactions (flows); valuation changes (exchange rates, prices); or other adjustments (e.g., uncompensated seizures). Balance of payments accounts reflect only transactions.

### Principles and Concepts (selected)
- Double-entry system:
  - Every recorded transaction is represented by two entries with equal values: one credit (positive sign) and one debit (negative sign). In principle, sum of credits equals sum of debits and net balance is zero.
  - In practice, accounts frequently do not balance; a summary net credit or net debit (net errors and omissions) is shown and a balancing entry with reversed sign is made. A large, persistent residual impedes analysis and credibility and may have implications for the investment position statement.
  - Recording conventions:
    - Credits: exports of real resources; reductions in an economy’s foreign assets or increases in foreign liabilities.
    - Debits: imports of real resources; increases in assets or decreases in liabilities.
    - For assets: credit = decrease in holdings; debit = increase in holdings.
    - For liabilities: credit = increase; debit = decrease.
    - Transfers: shown as credits when offsets are debits and as debits when offsets are credits.
- Gross vs. net recording:
  - Coverage depends on whether transactions are recorded gross or net; the Manual contains recommendations on which transactions should be recorded gross or net.
- Concepts of economic territory, residence, and center of economic interest:
  - Identical to SNA concepts. Economic territory: geographic territory administered by a government where persons, goods, and capital circulate freely; for maritime countries includes islands subject to same fiscal and monetary authorities as the mainland.
  - Institutional unit is resident when it has a center of economic interest within the economic territory and engages or intends to continue engaging in economic activities and transactions on a significant scale (one year or more may be used as a guideline but not as an inflexible rule).
- Principles for valuation and time of recording:
  - Valuation: transactions generally valued at actual market prices agreed upon by transactors; stocks conceptually valued at market prices prevailing at the reference time. Chapter 5 provides full exposition of valuation principles and practices.
  - Time of recording: principle of accrual accounting governs time of recording; transactions recorded when economic value is created, transformed, exchanged, transferred, or extinguished. Claims and liabilities arise when there is a change in ownership (legal or economic). When change of ownership is not obvious, time recorded in parties’ books may be used as a proxy. Recommended timing, conventions, and exceptions are covered in subsequent chapters.

*Source: PREFACE, Balance of Payments Manual (1993 edition).*

### Chapter 6.)

### Chapter 6.

### Concept and Types of Transactions
- Paragraph 25: Balance of payments records changes in economic relationships stemming primarily from dealings between a resident and a nonresident (with one exception noted in a footnote). Specific entries follow the list of standard components (see Chapter 8) and detailed guidance from Chapter 9 onward.
- Paragraph 26: The balance of payments concerns transactions—not just payments. Many international transactions recorded do not involve monetary payment or are not paid for; this distinguishes a balance of payments statement from a record of foreign payments.
- Exchanges (Paragraph 27):
  - Exchanges: transactors provide economic value and receive equal value in return.
  - Economic values exchanged: real resources (goods, services, income) and financial items.
  - Parties are residents of different economies, except for foreign financial item exchanges between resident sectors.
  - Provision of a financial item may change ownership, create new claims/liabilities, cancel existing ones, or alter contractual terms (e.g., maturity) by agreement; such changes are covered in the balance of payments.
- Transfers (Paragraph 28):
  - Transfers differ from exchanges because one transactor provides economic value without receiving a quid pro quo that is assigned economic value under the conventions.
  - Such transfers are shown in the balance of payments: current transfers in the current account (see Chapter 15) and capital transfers in the capital account (see Chapter 17).
- Migration (Paragraphs 29–30):
  - Migration changes an individual’s residence and thereby affects the composition of an economy’s associated entities.
  - Movable tangible assets effectively move with the migrant; immovable assets and assets left behind become claims of the new economy on the old economy.
  - The migrant’s claims/liabilities to residents of other economies become foreign claims/liabilities of the new economy; claims/liabilities to residents of the new economy cease to be rest-of-world items.
  - The net of these shifts equals the migrant’s net worth; that net worth is recorded as an offset and is conventionally included with transfers in the balance of payments.
- Other imputed transactions (Paragraph 31):
  - Some transactions are imputed when no actual flows occur. Example: attribution of reinvested earnings to foreign direct investors.
  - Reinvested earnings: recorded as part of direct investment income; offsetting entry of opposite sign in the financial account under direct investment—reinvested earnings reflects increased investment in the foreign enterprise.
  - Reinvested earnings are discussed in chapters 14 and 18.

### Changes Other Than Transactions
- Reclassification of claims and liabilities (Paragraph 32):
  - Financial items are classified to reveal creditor/debtor motivation; reclassification occurs when motivation changes (e.g., portfolio investors forming an associated group satisfying direct investment criteria).
  - Such reclassifications affect the international investment position at period end but do not appear in the balance of payments.
  - Example: transfers between reserve assets and other assets when claims come under or are released from control of resident monetary authorities.
- Valuation changes (Paragraph 33):
  - Values of real resources and financial items change due to (i) changes in customary transaction prices in the currency quoted, and/or (ii) changes in exchange rates of that currency relative to the unit of account used.
  - Valuation changes are not included in the balance of payments but are included in the international investment position.

### Balance of Payments and National Accounts
- Introduction and linkage to SNA (Paragraphs 34–37):
  - Balance of payments accounts and the international investment position are closely linked to the System of National Accounts (SNA), which is the international standard framework covering transactions, other flows, stocks, and other changes across accounting periods.
  - Balance of payments and international investment position data are typically compiled first and then incorporated into national accounts.
  - The SNA is a closed system: every transaction has both use and resource recorded; external flows are captured in the rest of the world account, constructed from the perspective of the rest of the world (balance of payments entries are reversed in rest of the world presentation).
- Concordance of principles (Paragraphs 38–44):
  - There is virtually complete concordance between the Manual and the SNA on delineation of resident units, valuation of transactions and external assets/liabilities, timing of recording, conversion procedures, and coverage of international transactions in goods, services, income, and transfers.
  - Resident unit identification invokes economic territory and center of economic interest (see Chapter 4).
  - Market price is the primary valuation concept (see Chapter 5).
  - Both systems employ accrual accounting principles (see Chapter 6 for accrual application in balance of payments).
  - Conversion procedures for multi-currency transactions are consistent between systems (see Chapter 7).
  - Classification schemes differ in detail because the rest of the world account emphasizes production, income, and accumulation flows, while balance of payments classification serves analytical needs; overall congruence with the SNA framework is prioritized over exact detailed concordance.
- Integrated economic accounts and links (Paragraphs 45–51):
  - Integrated economic accounts (T-accounts) present SNA structure: current accounts, accumulation accounts, and balance sheets for sectors and the total economy; resources and uses, stocks of assets and liabilities, and net worth are shown in a double-entry layout.
  - SNA current accounts cover output, intermediate consumption, value added, distributive transactions linked to production, primary and secondary income distribution (including rest of the world flows), income redistribution, and use of income; saving is the balancing item linking to accumulation accounts.
  - Accumulation accounts show changes in assets, liabilities, and net worth; first group includes capital and financial accounts (showing net lending/net borrowing), second group covers other changes (discoveries, natural catastrophes, uncompensated seizures, price and exchange rate effects).
  - Balance of payments flows map to SNA accounts: credits/debits for goods and services correspond to exports/imports and affect GDP measurement and composition.
  - Income flows in the balance of payments (compensation of employees, property income) and current transfers match SNA coverage and feed into disposable income and saving.
  - Capital and financial accounts in the SNA portray accumulation and financing: capital account shows sources of financing (saving and net capital transfers) and composition of investment; net lending/net borrowing equals current account balance plus capital account balance in the balance of payments and represents net financial investment vis‑à‑vis the rest of the world.
  - Rest of the world columns in integrated accounts are presented from nonresident perspective; changes in rest of the world assets correspond to changes in compiling economy liabilities, and vice versa.
- Residence guidelines (Paragraph 51 begins discussion; content continues beyond supplied excerpt).

*Source: _bopman - Chapter 6.)*

### Chapter 4), transactions in land can only take place

### _bopman - Chapter 4), transactions in land can only take place

### CONCEPTUAL FRAMEWORK — financial account and national accounts linkage
- Transactions in land can only take place between resident entities. When a nonresident entity (other than a foreign government or international organization acquiring land for use as an extraterritorial enclave) acquires land in the domestic economy, the acquisition is considered a financial investment (included in net incurrence of liabilities) in a notional resident enterprise.
- The financial account of the SNA shows the net acquisition of financial assets and the net incurrence of liabilities. Transactions in financial assets and liabilities for each institutional sector and the total economy encompass those among domestic sectors and those related to the rest of the world.
- Consolidated domestic flows cancel each other so that transactions for the economy as a whole are:
  - accounted for by transactions vis-à-vis the rest of the world; and
  - equal to flows shown in columns for the rest of the world.
- In the balance of payments, transactions (from the viewpoint of the compiling economy) in the financial account of the capital and financial account correspond to entries in columns for the financial account of the rest of the world; changes in assets of the rest of the world represent changes in liabilities for the compiling economy and vice versa.

### Algebraic linkage of key aggregates (symbols and identities)
- Symbols defined:
  - C = private consumption expenditure
  - G = government consumption expenditure
  - I = gross domestic investment
  - S = gross saving
  - X = exports of goods and services
  - M = imports of goods and services
  - NY = net income from abroad
  - GDP = gross domestic product
  - GNDY = gross national disposable income
  - CAB = current account balance in the balance of payments
  - NCT = net current transfers
  - NKT = net capital transfers
  - NPNNA = net purchases of nonproduced, nonfinancial assets
  - NFI = net foreign investment or net lending/net borrowing vis-à-vis the rest of the world
- Core identities (balance of payments flows italicized in source):
  - GDP = C + G + I + X–M
    - (X–M = balance on goods and services in the balance of payments)
  - CAB = X – M + NY + NCT
  - GNDY = C + G + I + CAB
  - GNDY – C – G = S
  - S = I + CAB
  - S – I = CAB
  - S – I + NKT – NPNNA = CAB + NKT–NPNNA = NFI
    - (NKT – NPNNA = balance on the capital account of the balance of payments)

### Integrated accounts, balance sheets, and the IIP
- Balance sheet accounts for the total economy and domestic institutional sectors depict the level and composition of the stock of assets and liabilities at the beginnings and ends of reference periods.
- Net worth equals the difference between the sum of assets and the sum of liabilities.
- In integrated accounts, financial assets and liabilities recorded in columns for the total economy are an aggregation of the financial assets and liabilities of individual sectors; balance sheet accounts of a nation as a whole are not fully consolidated.
- If accounts were fully consolidated, domestic sectors’ financial assets and liabilities would cancel and the economy’s financial assets and liabilities would refer to the stock of external assets and liabilities (the international investment position, IIP).
- National wealth or net worth consists of:
  - stock of nonfinancial assets; plus
  - net international investment position (stock of external assets minus stock of external liabilities).
- The IIP may be derived from the integrated accounts column for assets and liabilities of the rest of the world; from the IIP viewpoint, assets of the rest of the world represent liabilities of the compiling economy and vice versa.
- Appendix 1 discusses relationships between SNA accounts pertaining to the rest of the world, balance of payments accounts, and the IIP; focus is on classification issues and bridges to derive national accounts flows and stocks from balance of payments accounts and the IIP.

### CONCEPT AND DEFINITION OF RESIDENCE — principle and importance
- Residence is a critical attribute for identifying transactions between residents and nonresidents in the balance of payments and for delimiting domestic production in the SNA.
- The concept of residence in this Manual is identical to that used in the SNA and is not based on nationality or legal criteria; it is based on a sectoral transactor’s center of economic interest.
- Country boundaries used for political purposes may not align with economic territory; the relevant area for residence is the economic territory of a country.
- An institutional unit is a resident unit when it has a center of economic interest in the economic territory of a country.

### Economic territory of a country — components and exclusions
- The economic territory of a country consists of:
  - the geographic territory administered by a government where persons, goods, and capital circulate freely;
  - islands belonging to the country subject to the same fiscal and monetary authorities as the mainland;
  - airspace, territorial waters, and continental shelf over which the country enjoys exclusive rights and jurisdiction over fishing rights and rights to fuels or minerals below the sea bed;
  - territorial enclaves in the rest of the world (clearly demarcated land areas such as embassies, consulates, military bases, etc.) used by governments that own or rent them for extraterritorial purposes with formal political agreement of the host governments;
  - free zones and bonded warehouses or factories operated by offshore enterprises under customs control (considered part of the economic territory where physically located).
- Territorial enclaves used by foreign governments or international organizations may be physically within a country’s geographical boundaries but are not included in that country’s economic territory.
- The economic territory of an international organization consists of territorial enclave(s) over which the organization has jurisdiction; these are clearly demarcated land areas or structures the international organization owns or rents and uses for organizational purposes formally agreed with the host country or countries.

### Center of economic interest — criteria and the one-year guideline
- A center of economic interest exists when there is, within the economic territory, a location, dwelling, place of production, or other premises on or from which the unit engages and intends to continue engaging, indefinitely or over a finite but long period, in economic activities and transactions on a significant scale. The location need not be fixed so long as it remains within the economic territory.
- It is reasonable to assume a center of economic interest exists if the unit has engaged in economic activities and transactions on a significant scale in the country for one year or more, or intends to do so. The one-year period is a guideline and not an inflexible rule.

### Ownership of land and notional units
- Ownership of land and structures located within a country’s economic territory is sufficient qualification for the owner to have a center of economic interest in that country.
- Land and buildings can only be used for purposes of production in the country where they are located and their owners, in their capacity as owners, are subject to that country’s laws and regulations.
- An owner resident in another country who has no other economic interest in the country where the land or buildings are located is treated as if ownership were transferred to a notional institutional unit resident in that country. That notional resident unit:
  - is treated as owned and controlled by the nonresident owner (similar to a quasi-corporation);
  - receives rents and rentals paid by tenants; and
  - transfers the income to the actual nonresident owner.

### Resident institutional units — sectors and households
- Sectors of an economy are composed of:
  - households and individuals who make up a household; and
  - legal and social entities such as corporations and quasi-corporations (e.g., branches of foreign direct investors), nonprofit institutions, and the government.
- These institutional units must meet certain criteria to be considered resident units of the economy.

### Residence of households and individuals — rules and exceptions
- A household has a center of economic interest when household members maintain, within the country, a dwelling or succession of dwellings treated and used by members as their principal residence. All individuals belonging to the same household must be residents of the same country.
- If a member of an existing household ceases to reside in the country where the household is resident, the individual ceases to be a member of that household.
- Individuals who leave the economic territory and return after a limited period continue to be residents if their center of economic interest remains in the economy where the household is resident. Treated as residents are travelers or visitors who leave for less than one year for business or personal purposes (see paragraphs 71, 243, and 244).
- Workers or employees who operate partly or wholly outside their resident household’s economic territory but maintain the household include:
  - seasonal workers;
  - border workers who cross frontiers regularly or somewhat less regularly;
  - staff of international organizations working in enclaves;
  - locally recruited staff of foreign embassies, consulates, military bases, etc.;
  - crews of ships, aircraft, or other mobile equipment operating partly or wholly outside an economic territory.
- An individual may cease being a member of a resident household when he or she works continuously for one year or more in a foreign country. If the individual sets up a new household or joins a household in the country where he or she works, the person is no longer treated as a member of the original household.
- Even if employed and paid by an enterprise resident in the home country, a person working continuously in the host country for one year or more should normally be treated as a resident in the host country and as an employee of a quasi-corporation resident in the host country.

*Source: _bopman - Chapter 4), transactions in land can only take place*

### CHAPTER IV

### CHAPTER IV

### Residence of Individuals and Special Cases
- Technical assistance personnel assigned abroad:
  - Treated as residents of the countries where they work and as employees of their host governments, of international organizations functioning on behalf of governments, or of international organizations actually financing the technical assistance work.
  - Transfers of funds should be imputed from the governments or international organizations that actually employ the technical assistance personnel to the host governments to cover the cost of salaries, allowances, transportation expenses, administrative costs, etc. related to the technical assistance personnel. (See paragraph 69.)
- Military personnel and civil servants (including diplomats) employed abroad in government enclaves:
  - Enclaves—military bases, embassies and the like—form part of the economic territory of the employing government.
  - Government employees working in such enclaves continue to have centers of economic interest in their home countries and continue to be residents in their home countries even if they live in dwellings outside the enclaves. (See paragraph 70.)
- Students and medical patients abroad:
  - However long they study abroad, students should be treated as residents of their countries of origin, as long as they remain members of households in their home countries; their centers of economic interest remain in their countries of origin. (See paragraph 71.)
  - Medical patients staying abroad are also treated as residents of their countries of origin, even if their stays are one year or more, as long as they remain members of households in their countries of origin. (See paragraph 71.)
- Individuals with several international residences:
  - Some individuals may remain for short periods (e.g., three months in each of four countries) during a specific year; their centers of economic interest often are international rather than designated economies.
  - While consideration should be given to such factors as tax status, citizenship (can be dual), etc., this Manual and the SNA do not recommend a specific treatment; the choice is left to the discretion of the economies concerned. Coordination is encouraged to foster international comparability. (See paragraph 72.)

### Residence of Enterprises: Definition and Activity
- Enterprise residence criteria:
  - An enterprise is resident of a country (economic territory) when the enterprise is engaged in a significant amount of production of goods and/or services there or when the enterprise owns land or buildings located there.
  - The enterprise must maintain at least one production establishment in the country and must plan to operate the establishment indefinitely or over a long period of time.
  - Together with other considerations covered in paragraph 78, a guideline of one year or more, to be applied flexibly, is suggested. (See paragraph 73.)
- Definition of enterprise terms:
  - "Enterprise" is inclusive of "corporation" and "quasi-corporation" as defined in the SNA. (See paragraph 74.)
  - Corporation: legal entity created for producing goods or services for the market; collectively owned by shareholders who appoint directors.
  - Quasi-corporation: unincorporated enterprise operated as if it were a separate corporation with a complete set of accounts; de facto relationship to owner same as corporation to shareholders. (See paragraph 74.)

### Types of Enterprises
- Private enterprises include:
  - (i) incorporated enterprises (e.g., corporations, joint stock companies, limited liability partnerships, cooperatives, or other business associations recognized as independent legal entities by virtue of registration under company and similar acts, laws, or regulations);
  - (ii) unincorporated enterprises; and
  - (iii) nonprofit institutions. (See paragraph 76.)
- Public enterprises include:
  - (i) unincorporated government enterprises; and
  - (ii) public corporations incorporated by virtue of company acts or other public acts, special legislation, or administrative regulations.
  - Public corporations hold and manage financial assets and liabilities, as well as tangible and nonfinancial intangible assets, involved in corporation business. (See paragraph 77.)
- Enterprises may be privately owned and/or controlled, publicly owned and/or controlled, or controlled by residents and/or nonresidents; may be financial or nonfinancial institutions. (See paragraph 75.)
- The principal public monetary institution is usually the central bank—the publicly owned and/or controlled monetary authority. (See paragraph 77.)

### Attribution of Production and Offshore/Site Operations
- Production undertaken outside the economic territory by personnel, plant, and equipment of a resident enterprise:
  - Treated as part of host country production and the enterprise is treated as a resident unit (branch or subsidiary) of that country if the enterprise meets conditions in paragraph 73 and, among other considerations, maintains a complete and separate set of accounts of local activities, pays income taxes to the host country, has a substantial physical presence, receives funds for enterprise work for the enterprise account, etc.
  - If these conditions are not met, the activity should be classified as an export of services by a resident enterprise. (See paragraph 78.)
- Construction and major projects:
  - Construction involving major specific projects often carried out and managed by nonresident enterprises through unincorporated site offices will, in most instances, meet the criteria requiring site office production to be treated as production of a resident unit and part of host economy production rather than as an export of services. (See paragraph 78.)
- Offshore enterprises in special zones:
  - Offshore enterprises engaged in manufacturing processes (including assembly of components manufactured elsewhere) are residents of the economies in which the offshore enterprises are located, regardless of location in special zones of exemption from customs or other regulations or concessions.
  - Applies also to nonmanufacturing operations, including so-called special purpose enterprises. (See paragraphs 79; cross-references: paragraphs 365 and 381.)

### Units Operating Mobile Equipment and Ships Flying Flags of Convenience
- Mobile equipment operations:
  - Principles for enterprise residence apply to enterprises operating mobile equipment (ships, aircraft, drilling rigs and platforms, railway rolling stock, etc.).
  - If operations take place in international waters or airspace, activities attributed to the economy in which the operator maintains residence.
  - If production takes place in another economy, the enterprise may be considered to have a center of economic interest in the other economy if accounted for separately by the operator and recognized as a separate enterprise by tax and licensing authorities of that other economy; otherwise production is attributed to the original operator’s country of residence.
  - If operations are carried out on a regular and continuing basis in two or more countries, the enterprise is deemed to have a center of economic interest in each country and thus to have separate resident units in each, provided the enterprises are accounted for separately by the operator and recognized as separate enterprises by tax and licensing authorities in each country. (See paragraph 80.)
  - In leasing of mobile equipment to one enterprise by another for a long or indefinite period, the lessee enterprise is deemed to be the operator, and activities are attributed to the country where the lessee is resident. (See paragraph 80.)
- Ships flying flags of convenience:
  - Shipping activity is attributed in principle to the country of residence of the operating enterprise, despite complex arrangements and differing country of registry.
  - If an enterprise establishes, for tax or other considerations, a branch (direct investment) in another country to manage the operation, the operation is attributed to the resident (branch) operating in that country. (See paragraph 81.)
- Exceptional multi-registry corporations:
  - Corporations registered in two or more countries under cooperative special legislation may be treated either by allocating transactions to countries of registry in proportion to financial capital contributed or shares in equity, or by treating the corporation as resident where headquarters are located and treating premises in other countries as foreign branches.
  - The first method is preferable; both are consistent with the Manual and the SNA. Choice may be made on statistical convenience and consistent treatment by partner countries. (See paragraph 82.)

### Agents
- Transactions of agents:
  - Transactions of agents should be attributed to the economies of principals on whose behalf the transactions are undertaken and not to the economies of agents representing or acting on behalf of principals.
  - Services rendered by agents to enterprises represented should be attributed to the economies in which the agents are residents. (See paragraph 83.)

### Residence of Nonprofit Institutions (NPIs)
- NPI residence:
  - An NPI is resident in the country or economic territory where the NPI has a center of economic interest, usually where legally created and officially recognized and recorded.
  - When an NPI is engaged in charity or relief work on an international scale, specify the residence of any branches maintained for dispensing relief in individual countries.
  - If an NPI maintains a branch or unit for one year or more in a particular country, that branch or unit should be considered a resident NPI that is financed largely or entirely by transfers from abroad. (See paragraph 84.)

### General Government and Extraterritorial Entities
- General government residents:
  - General government agencies that are residents of an economy include all departments, establishments, and bodies located in the economic territory of an economy’s central, state, and local governments and all embassies, consulates, military establishments, and other entities, which are located elsewhere, of an economy’s general government. (See paragraph 85.)
- Coverage of general government:
  - Covers all unclassified agencies of public authorities including departments, offices, and bodies that engage in administration, defense, regulation of public order; promotion of economic growth, welfare, technological development; and provision of educational, health, cultural, recreational, and other social and community services free of charge or at sales prices that do not cover most or all of costs of production.
  - Includes nonprofit organizations serving individuals or business enterprises that are wholly, or mainly, financed and controlled by public authorities and nonprofit organizations primarily serving government bodies.
  - Covers social security arrangements imposed, controlled, or financed by the government, including voluntary social security arrangements for certain sections and pension funds considered part of public social security schemes.
  - Includes unincorporated government enterprises that primarily produce goods and services for the government or primarily sell goods and services to the public, and public, nonmonetary saving and lending bodies financially integrated with a government or lacking authority to acquire financial assets or incur liabilities in the capital market. (See paragraph 86.)
- Extraterritorial status of foreign government establishments:
  - Embassies, consulates, military establishments, and other entities of a foreign general government are considered extraterritorial by the economies in which they are physically located.
  - When resident producers of an economy construct embassies, structures, or other works in an extraterritorial enclave, the construction is part of the production and exports of the economy in which the enclave is located.
  - Wages and salaries paid to locally recruited staff of foreign diplomatic, military, and other establishments are payments to residents of the economies in which these establishments are located. (See paragraph 87.)

### International Organizations and Regional Central Banks
- International organizations (not qualifying as enterprises):
  - Most political, administrative, economic, social, or financial institutions in which members are governments (or other international organizations with memberships consisting of governments) do not qualify as enterprises.
  - International organizations are created for provision of nonmarket services of a collective nature for members and/or financial intermediation or channeling of funds between lenders and borrowers in different economies; established by political agreement with status of international treaties; accorded privileges and immunities; not subject to laws and regulations of economies where located; treated as extraterritorial entities by those economies. Pension funds operated by these bodies are treated as residents of the economies in which the organizations are located.
  - Employees of international organizations are residents of national economies where they are expected to maintain their abodes for one year or more; wages and salaries paid by international organizations to their employees are payments to residents of the economies in which the employees are stationed for one year or more. (See paragraph 88.)
  - Enterprises owned jointly by two or more governments are not treated as international bodies but are residents of the economic territories where they operate. (See paragraph 89.)
- Regional central banks:
  - A regional central bank is an international financial institution acting as a common central bank for a group of member countries with headquarters in one country and national offices in each member country.
  - Each national office acts as the central bank for that country and must be treated as an institutional unit separate from the headquarters institution; each national office is a resident unit of the country where the office is located.
  - The financial assets and liabilities of a regional central bank should be allocated among the national offices in proportion to the claims that such offices have over the bank’s collective assets. (See paragraph 90.)

*Source: CHAPTER IV*

### CHAPTER IV

### CHAPTER IV

### Concept of Market Price
- A uniform system of valuation for international accounts is required for consistent aggregates and international comparability.
- The Manual recommends market price as the basis of valuation for both (i) transactions in real resources and financial assets and liabilities and (ii) stocks of assets and liabilities.
- Transactions: generally valued at the actual prices agreed upon by transactors.
- Stocks: valued at market prices in effect at the time to which the balance sheet relates.
- These principles are in accord with those presented in the SNA.
- See paragraphs 93, etc. for discussion of instances in which the concept may be impractical or difficult to apply.

### Transactions and Market Price
- Market prices for transactions are defined as amounts of money that willing buyers pay to acquire something from willing sellers; exchanges are made between independent parties and on the basis of commercial considerations only.
- A market price refers only to the price for one specific exchange under the stated conditions; a second exchange of an identical unit could result in a different market price.
- Distinction: market price (specific exchange) versus market quotation terms such as a price quoted in the market, a world market price, a going price, or a fair market price.
- A market price is not necessarily equivalent to a free market price; market transactions may occur in monopolistic, monopsonistic, or any other market structure, including extremely narrow markets.

### Valuing Transactions in the Absence of Market Price
- Situations where essential elements for establishing market prices may be lacking include:
  - direct exchange of goods for other goods rather than for money (barter);
  - transactions where one party does not enter willingly (tax payments);
  - buyer and seller are the same legal entity but separate under balance of payments conventions (a branch and the parent enterprise);
  - transactions between separate legal entities that are not independent (affiliated enterprises);
  - transactions where legal change of ownership does not actually occur (goods transferred under a financial lease arrangement);
  - transactions involving private, nonprofit entities or general government bodies that contain an element of gift or grant and are undertaken for other than purely commercial considerations.
- More than one condition may be absent in a particular case; examples are not all-inclusive or mutually exclusive.

### Market Price Equivalents
- Where no actual market price exists, it is sometimes necessary to develop proxies or substitute measures for market prices for balance of payments recording.
- Customary approach: construct prices by analogy with known market prices established under conditions considered essentially the same.
  - Example: in barter, goods or services bartered should be valued at the prices that would have been received if sold (e.g., a standard market quotation).
- The approach must be limited to transactions to which it is applicable; superficially alike transactions may be subject to implicit or concealed factors affecting values.

### Affiliated Enterprises
- Transactions between affiliated enterprises integrated under the same management cannot necessarily be considered market transactions because of lack of independence.
- Whether book transactions reflect market values must be judged for each enterprise.
- If a group of affiliated enterprises allocates gross earnings realistically among units, bookkeeping practices reflecting market-related pricing (transfer pricing) might be equivalent to market valuation.
- Transfer pricing not based on market considerations can be common in cross-border affiliated enterprises due to tax and regulatory disparities; such pricing may not accurately reflect economic relationships.
- When distortions are large, replacement of book values with market value equivalents is desirable in principle.
- Estimating market-value substitutes raises procedural and propriety questions; a value approximating market price may be difficult to estimate.
- Values for transactions among affiliates are not necessarily equal to market prices for similar transactions with outsiders because market prices reflect demand and supply in each specific market; physically indistinguishable commodities may have different market prices.
- Evaluation of transfer prices:
  - Relevant comparison may be from the relative position of the transfer in the chain of production to the point of actual sale to an independent party, e.g., in terms of costs embodied up to that stage of production.
  - A transfer price that does not seem commensurate with production costs up to that stage is probably not an adequate proxy for a market price.
  - If the transfer price covers production costs, it could be accepted as a suitable proxy, even if different from the price charged to an independent party.
  - Production cost information in affiliate books may be affected by transfer pricing for inputs from other affiliates.
- Some affiliate exchanges (specialized components; management services; technical know-how) may have no near equivalents in transactions between independent parties, making determination of market-comparable values very difficult.
- Compilers may have no choice but to accept valuations based on explicit production costs or other values assigned by the enterprise; tax, customs, exchange control, and other authorities usually influence accounting practices.

### Consistency and Substitution Practices
- Because balance of payments accounting uses double entries, any substitution should, in principle, be applied consistently across the statement (e.g., replacing book value of goods shipped from a direct investment enterprise to the parent requires adjusting direct investment income and/or financial flows by the same amount).
- Substitution of imputed market values for actual transfer values should be the exception rather than the rule.
- If transfer prices significantly distort measurement, they should either be replaced by market price equivalents or be separately identified for analytical purposes.
- Selection of best market value equivalents requires cautious and informed judgment and often necessitates sample surveys, contacts with enterprises and government agencies, exchanges of information between compilers in partner countries, or similar statistical research.

### Noncommercial Transactions
- Noncommercial transactions (provision of an economic value for which the offset constitutes a transfer) have no market price by definition.
- Examples include outright gifts and transactions with implied prices that include grant or concession elements (e.g., negotiated exchanges of goods between governments, government loans bearing lower interest rates than commercial terms).
- Transactions by general government bodies and private, nonprofit entities not engaged in purely commercial undertakings are often subject to noncommercial considerations; transfers may also be provided or received by other sectors.
- When real resources are transferred without a quid pro quo to nonresidents by government or private, nonprofit institutions, the same values must be reflected in the balance of payments of both recipient and donor.
- Such resources should be valued at the market prices that would have been received if sold, following national accounts procedure.
- Imputations may not approximate the desired basis of valuation; donor and recipient views of imputed value may differ.
- Rule of thumb: use the value assigned by the donor as the basis for recording.

### Financial Items
- Transactions in financial items should be recorded at the prices at which items are acquired or disposed of.
- If financial items are traded in an organized market and buyers and sellers deal through an agent, market prices established in the market meet the balance of payments market price definition.
- If financial items are not traded, application of market price concept may be less apparent.
  - Cash items (currency and transferable deposits redeemable on demand at nominal values) have only one value and that value can be regarded as the actual market price.
  - Market prices to be imputed to nonmarketable financial items (primarily loans) are the nominal values.
  - If a secondary market develops and items become marketable (often at substantial discounts from nominal values), those market prices should be recorded for transactions in such loans.
  - For related valuation adjustments, debt/equity swaps, see paragraphs 456 and 471.
- Valuation of financial items should exclude service charges, fees, commissions, or income; those amounts should be recorded in the appropriate component of the current account.

### Valuation of Stocks of Assets and Liabilities
- In principle, all asset and liability stocks comprising a country’s international investment position should be measured at market prices, assuming continuous (regular) revaluation (e.g., by reference to actual market prices for shares and bonds or, in direct investment, by reference to enterprise balance sheets).
- Market price measurement cannot always be implemented due to absence of regular revaluations.
  - Balance sheet value is often the only valuation available for direct investment; that value might be based on original cost, a more recent revaluation, or current value (use of current value would be in accordance with market price principle).
  - When direct investment enterprises are listed on stock exchanges, listed prices should be used as the market values of shares in those enterprises.

### Time of Recording — Principle of Timing
- In the double-entry system, two entries must be recorded simultaneously for each transaction so both entries show the transaction occurring on the same date; rules govern determination of the time when a transaction occurs.
- A typical transaction may involve a series of actions (contract/commitment, acquiring a claim for payments, receiving settlement).
- Transactions are recorded when economic value is created, transformed, exchanged, transferred, or extinguished; the time of recording is governed by the principle of accrual accounting.
- Claims and liabilities arise when there is a change in ownership—legal, physical, or economic (control or possession).
- Two stages may be involved in an exchange: (i) provision of one resource accompanied by acquisition of a financial claim, and (ii) provision of the other resource accompanied by extinguishment of the claim.
- When a change in ownership is not obvious, it is considered to occur at (or is proxied by) the time the parties record it in their books or accounts.
- In practice, the two entries often derive independently from different sources and accounting records, and conventions for time of recording may differ, so simultaneous recording may not be achieved.

### Application to Goods
- Trade statistics often are recorded on the basis of customs documents reflecting physical movement of goods across the national or customs frontier.
- Actual movement may not coincide with change in ownership between resident and nonresident.
- The change in ownership is considered to occur at (or is proxied by) the time the parties record it in their books or accounts (paragraph 123 reference).
- Convention for consistency:
  - Goods for export: considered to change ownership when the exporter ceases to carry the goods on his books as a real asset and makes a corresponding change in his financial items.
  - Goods for import: considered to change ownership when the importer enters the goods on his books as a real asset and makes a corresponding change in his financial items.
- This convention promotes consistency between goods and the financial account in the compiling country’s balance of payments and between compilation by exporting and importing countries.
- Numerous transactions consist of an exchange (e.g., goods for financial assets) between two enterprises; accounting entries in each company’s books will show the same dates for acquisition of the goods.

*Italic: CHAPTER IV, Valuation and Time of Recording — IMF manual content.*

### CHAPTER VI

### CHAPTER VI

### Timing of Recording and the Change of Ownership Principle
- Principle: Transactions should be recorded at the time of change in ownership of a real resource or at the time of occurrence of financial transactions so that entries of both parties correspond (see paragraphs 115–118).
- When provision of a real resource and a related extension of credit occur:
  - Prepayments: record importer’s acquisition of a claim on the exporter during the interim period.
  - Postpayments: record importer’s interim liability to the exporter.
  - Creation and extinguishing of obligations, change in ownership of goods, and payment are shown in the balance of payments in the periods in which each occurs (paragraph 118).
- Trade statistics based on customs documents may approximate timing by showing evidence of physical possession (paragraph 117).
- Entries should ideally be dated the same by both parties to provide a fixed point in time for the transaction (paragraph 115).

### Exceptions to the Change of Ownership Principle
- Goods under financial lease arrangements and goods shipped between parent direct investment enterprises and branches/affiliates are recorded despite no change of legal ownership; entries should be dated to approximate change in physical possession (paragraphs 119–120).
- Goods sent abroad for processing:
  - SNA distinction: goods sent abroad for processing that are reclassified upon return in a different three-digit group of the CPC are included, on a gross basis, under goods; other processing is recorded under services (paragraph 120).
  - Manual recommendation: due to practical difficulties, record all processing of goods that cross the frontier, on a gross basis, under goods (paragraph 120).
- Repairs on goods are valued at prices of repairs (fees paid or received), not at gross values of goods before and after repairs (paragraph 155).

### Applications to Services, Income, Transfers, and Financial Items
- Services: generally recorded when rendered; prepayments and postpayments handled as for goods (paragraph 121).
- Investment income:
  - Interest: recorded on an accrual basis; if unpaid, record interest and an offsetting credit in the financial account for the associated claim (paragraph 121).
  - Zero coupon and deep discounted bonds: difference between issue price and value at maturity treated, on an accrual basis, as interest over the life of the bond (paragraph 121).
  - Dividends: recorded as of dates payable (paragraph 121).
  - Reinvested earnings on direct investment: recorded in periods when earned (paragraph 121).
- Taxes, fines, and transfers: recorded upon occurrence of underlying transactions or flows giving rise to liabilities; some taxes on income may be recorded in subsequent periods (paragraph 122).
- Financial items: transactions occur when both creditor and debtor have entered the claim and liability in their books; value date may be specified to ensure matching (paragraph 123).
  - Loan drawings: entered when actual disbursements are made.
  - Loan repayments: entered when due for payment; repayments not made are recorded as if contractual obligations were met. Entries are also recorded for replacements by new liabilities that are short-term or by new loans under rescheduling or special financing (paragraph 123).

### Timing Adjustments and Practical Compilation Guidance
- Prefer data sources that record correct timing (e.g., actual drawings on loans rather than authorization dates) (paragraph 124).
- Timing adjustments to trade statistics may be necessary when trade statistics do not reflect physical movements correctly or when reporting practices defer tabulation (paragraph 125).
- Long voyages can cause ownership to change at times different from trade-recorded dates; where unit values change substantially during reporting periods, inquiries and timing adjustments should be applied (paragraph 126).
- Goods on consignment: should be included in goods only at time ownership changes; if recorded at frontier crossing without change of ownership, later deduction adjustments are required (paragraph 127).

### Unit of Account: Choice and Conversion Principles
- Two viewpoints:
  - National compiler: national currency unit is preferred for compatibility with national accounts; however, significant depreciation can reduce analytical value of statements in national currency (paragraph 129).
  - International organizations (IMF): require a standard unit of account that is preferably stable and familiar (e.g., U.S. dollar or SDR), though a perfectly stable ideal does not exist (paragraph 130).
- Reporting to the IMF: countries requested to compile statements in the unit of account adopted for national use; economies with multiple exchange rates should use methods suggested in paragraphs 134–135 (paragraph 131).
- Conversion principles:
  - Use market rates prevailing on transaction dates; if unavailable, use average rates for the shortest applicable period (paragraph 132).
  - Use midpoint between buying and selling rates to exclude service charge/spread (paragraph 132).
  - Forward contracts: differences between prevailing exchange rate and contract rate are reflected as separate transactions related to the derivative (paragraph 132).
  - Stocks of external financial assets and liabilities: use market exchange rates prevailing on the balance sheet date (midpoint between buying and selling spot rates) (paragraph 133).

### Multiple Official Exchange Rates and Parallel Market Rates
- Multiple official exchange rates:
  - Treat as incorporating implicit taxes or subsidies.
  - Implicit tax/subsidy for each transaction = difference between value at actual applicable rate and value at a unitary rate (weighted average of official rates) (paragraph 134).
  - Alternatives: use a unitary rate for conversion to avoid including transfers between residents and authorities, or use a principal rate (actual rate applying to the largest part of external transactions) (paragraph 135).
  - For stocks: use the actual exchange rate applicable to specific assets or liabilities at the beginning or end of the accounting period (paragraph 136).
- Black or parallel market rates:
  - If one official rate and a parallel rate exist, handle separately; convert transactions at the exchange rate for each (paragraph 137).
  - If multiple official rates and a parallel rate exist, treat official and parallel rates as distinct markets in unitary rate calculations; include parallel rate in unitary rate only if parallel market is effectively integrated or sanctioned (paragraph 137).
  - Use midpoint between buying and selling rates for parallel market conversions to exclude service charges (paragraph 138).
  - Revenues from trading currencies between official and parallel markets are treated as holding (capital) gains (paragraph 138).

### Structure and Classification of the Balance of Payments
- Part two of the Manual covers structure and classification of balance of payments accounts and the international investment position, including current account, capital and financial account, supplementary information, and the international investment position (paragraph 139).
- Objectives of arranging statistics within a coherent structure: policy formulation, analytical studies, projections, bilateral comparisons, regional/global aggregation (paragraph 140).
- Classification principles align with the SNA and the Central Product Classification (CPC) for services; framework links financial account structure to income accounts and international investment position (paragraphs 141–142).
- The classification system is flexible for use by countries at different stages of statistical development; some countries may report additional items beyond standard components (paragraphs 142, 144).

### Determination and Characteristics of Standard Components
- Criteria for selecting standard components (paragraph 143):
  - Distinctive behavior from other items.
  - Importance for a number of countries.
  - Feasibility of statistical collection.
  - Necessity for other purposes (e.g., national accounts reconciliation).
  - Manageable length for uniform reporting by many countries.
  - Concordance with IMF statistical systems, SNA, and CPC for services.
- Standard components should be reported as completely and accurately as possible though few countries can provide all items (paragraph 145).
- Most items in the current account should show gross debits and credits; most in the capital and financial account should be shown on a net basis (paragraph 150).
  - Inflows of real resources, increases in financial assets, and decreases in liabilities: debits.
  - Outflows of real resources, decreases in financial assets, and increases in liabilities: credits (paragraph 150).
  - Transfers in sections 1.C and 2.A should be numerically equal with opposite sign to the entries they offset (paragraph 150).

### Net Errors and Omissions
- Application of principles should produce a conceptual total of zero, but in practice a net credit or debit (net errors and omissions) will often appear due to compilation errors and omissions (paragraphs 146–147).
- Standard practice: present net errors and omissions as a separate balancing item (paragraph 147).
- The size of the residual does not necessarily indicate overall accuracy because some errors may offset one another; however, a large residual hampers interpretation (paragraph 148).

### Major Classifications and Current Account Components
- Two main groups of accounts (paragraph 149):
  - Current account: goods and services, income, and current transfers.
  - Capital and financial account: capital transfers and acquisition/disposal of nonproduced, nonfinancial assets; financial assets and liabilities.
- Change introduced: former capital account is renamed capital and financial account, reflecting SNA distinction between capital transfers and current transfers (paragraph 149).
- Current account (1.) covers all transactions other than financial items involving economic values between residents and nonresidents; major classifications are goods and services, income, and current transfers (paragraph 152).
- Goods and services (1.A.):
  - Goods (1.A.a.):
    - General merchandise: most movable goods undergoing changes in ownership, with exceptions (paragraph 153).
    - Goods for processing: exports/imports crossing frontier for processing and subsequent re-import/export valued on a gross basis; exception to change of ownership principle (paragraph 154).
    - Repairs on goods: repair activity on ships, aircraft, etc.; valued at repair fees (paragraph 155).
    - Goods procured in ports by carriers: fuels, provisions, stores, supplies procured abroad or in compiling economy; excludes auxiliary services which are under transportation (paragraph 156).
    - Nonmonetary gold: covers all gold not held as reserve assets; subdivided when feasible (paragraph 157).
  - Services (1.A.b.):
    - Transportation: freight, passenger transportation, distributive and auxiliary services, rentals of transportation equipment with crew; freight insurance included with insurance services (paragraph 158).
    - Travel: goods and services acquired by nonresident travelers during visits of less than one year; includes students and medical patients; excludes international passenger services (paragraph 159).
    - Communications services: postal, courier, telecommunications services and associated maintenance (paragraph 160).
    - Construction services: temporary project work performed abroad/in compiling economy or extraterritorial enclaves by enterprises and personnel; excludes work by foreign affiliate or equivalent site office (paragraph 161).
    - Insurance services: provision of insurance to nonresidents by resident insurers and vice versa; includes freight insurance, direct insurance, reinsurance (paragraph 162).
    - Financial services (other than insurance and pension funds): financial intermediation and auxiliary services, commissions and fees for letters/lines of credit, leasing services, foreign exchange transactions, brokerage, underwriting, hedging arrangements, custody services, etc. (paragraph 163).
    - Computer and information services: transactions related to hardware consultancy, software implementation, information services (data processing, data base, news agency) (paragraph 164).

_Italic source attribution: CHAPTER VI, _bopman - CHAPTER VI._

### CHAPTER VIII

### CHAPTER VIII

### Services classification and definitions
- Paragraph 165: Royalties and license fees covers receipts (exports) and payments (imports) of residents and nonresidents for (i) the authorized use of intangible nonproduced, nonfinancial assets and proprietary rights—such as trademarks, copyrights, patents, processes, techniques, designs, manufacturing rights, franchises, etc. and (ii) the use, through licensing agreements, of produced originals or prototypes—such as manuscripts, films, etc.
- Paragraph 166: Other business services provided by residents to nonresidents and vice versa covers merchanting and other trade-related services; operational leasing services; and miscellaneous business, professional, and technical services. (See the Selected Supplementary Information table at the end of this chapter and paragraphs 261 through 264 for details.)
- Paragraph 167: Personal, cultural, and recreational services covers (i) audiovisual and related services and (ii) other cultural services provided by residents to nonresidents and vice versa. Included under (i) are services associated with the production of motion pictures on films or video tape, radio and television programs, and musical recordings (examples: rentals and fees received by actors, producers, etc. for productions and for distribution rights sold to the media). Included under (ii) are other personal, cultural, and recreational services—such as those associated with libraries, museums—and other cultural and sporting activities.
- Paragraph 168: Government services n.i.e. covers all services (such as expenditures of embassies and consulates) associated with government sectors or international and regional organizations and not classified under other items.

### Income (1.B.)
- Paragraph 169: Compensation of employees covers wages, salaries, and other benefits, in cash or in kind, and includes those of border, seasonal, and other nonresident workers (e.g., local staff of embassies).
- Paragraph 170: Investment income covers receipts and payments of income associated, respectively, with residents’ holdings of external financial assets and with residents’ liabilities to nonresidents.
  - Investment income consists of direct investment income, portfolio investment income, and other investment income.
  - Direct investment component is divided into income on equity (dividends, branch profits, and reinvested earnings) and income on debt (interest).
  - Portfolio investment income is divided into income on equity (dividends) and income on debt (interest).
  - Other investment income covers interest earned on other capital (loans, etc.) and, in principle, imputed income to households from net equity in life insurance reserves and in pension funds.

### Current transfers (1.C.)
- Paragraph 171: Current transfers are distinguished from capital transfers (included in the capital and financial account in concordance with the SNA treatment of transfers).
  - Transfers are offsets to changes, between residents and nonresidents, in ownership of real resources or financial items and do not involve a quid pro quo in economic value.
  - Current transfers consist of all transfers that do not involve (i) transfers of ownership of fixed assets; (ii) transfers of funds linked to, or conditional upon, acquisition or disposal of fixed assets; (iii) forgiveness, without any counterparts being received in return, of liabilities by creditors. All of these are capital transfers.
  - Current transfers include those of general government (e.g., current international cooperation between different governments, payments of current taxes on income and wealth, etc.), and other transfers (e.g., workers’ remittances, premiums—less service charges, and claims on non-life insurance).
  - A full discussion of the distinction between current transfers and capital transfers appears in Chapter 15; see also paragraphs 175 and 344.

### Capital and Financial Account (2.)
- Paragraph 172: The capital and financial account has two major components—the capital account and the financial account—in concordance with those same accounts in the SNA. Assets represent claims on nonresidents, and liabilities represent indebtedness to nonresidents.
  - The two parties to a transaction in assets or liabilities are usually a resident and a nonresident but, in some instances, both parties may both be residents or nonresidents. (See paragraph 318.)
- Paragraph 173: All valuation changes and all other changes that do not reflect transactions (see paragraph 310) in foreign assets and liabilities are excluded from the capital and financial account but reflected in the international investment position.
  - Supplementary statements identify certain items of analytical interest (examples: liabilities constituting foreign authorities’ reserves and exceptional financing transactions; discussed in Chapter 22).
- Paragraph 174: Classification of the financial account and the income components of the current account are interrelated and must be consistent to facilitate analysis, to form an effective link between the balance of payments and the international investment position, and to be compatible with the SNA and other IMF statistical systems.

### Capital account (2.A.)
- Paragraph 175: Major components of the capital account are capital transfers and acquisition/disposal of nonproduced, nonfinancial assets.
  - Capital transfers: transfers of ownership of fixed assets; transfers of funds linked to, or conditional upon, acquisition or disposal of fixed assets; cancellation, without any counterparts being received in return, of liabilities by creditors.
  - Capital transfers include two components:
    - (i) general government, subdivided into debt forgiveness and other,
    - (ii) other, subdivided into migrants’ transfers, debt forgiveness, and other 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.)

### Financial account (2.B.)
- Paragraph 176: Classification criteria for standard components in the financial account:
  - All components are classified according to type of investment or by functional subdivision (direct investment, portfolio investment, other investment, reserve assets).
  - For direct investment: directional distinctions (abroad or in the reporting economy) and, for equity capital and other capital components, asset or liability distinctions.
  - For portfolio investment and other investment: customary asset or liability distinctions.
  - Distinctions by type of instrument are significant for portfolio investment and other investment (equity or debt securities, trade credits, loans, currency and deposits, other assets or liabilities). Traditional and new money market and other financial instruments and derivatives are included in portfolio investment when appropriate.
  - For portfolio investment and other investment: distinctions by sector of the domestic creditor for assets and by sector of the domestic debtor for liabilities to facilitate links with income accounts, the international investment position, the SNA, and other statistical systems.
  - The traditional distinction by contractual maturity (more than one year or one year or less) between long- and short-term assets and liabilities applies only to other investment. This distinction is accorded less importance in the SNA and in this Manual than in previous editions but is retained in this Manual for other investment for purposes such as external debt analysis.

- Paragraph 177: Direct investment
  - Reflects the lasting interest of a resident entity in one economy (direct investor) in an entity resident in another economy (direct investment enterprise).
  - Covers all transactions between direct investors and direct investment enterprises: initial transaction and all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated.
  - Direct investment transactions occurring abroad and in the reporting economy are subclassified into equity capital, reinvested earnings, and other capital (intercompany transactions).
  - For equity capital and other capital, claims on and liabilities to affiliated enterprises and to direct investors are distinguished.
  - Transactions between affiliated banks and between other affiliated financial intermediaries are limited to equity and permanent debt capital. (See paragraph 372.)

- Paragraph 178: Portfolio investment covers transactions in equity securities and debt securities.
  - Debt securities are subsectored into bonds and notes, money market instruments, and financial derivatives (such as options) when the derivatives generate financial claims and liabilities.
  - Various new financial instruments are covered under appropriate instrument classifications.
  - Transactions covered under direct investment and reserve assets are excluded.

- Paragraph 179: Other investment covers short- and long-term trade credits; loans (including use of Fund credit, loans from the Fund, and loans associated with financial leases); currency and deposits (transferable and other—such as savings and term deposits, savings and loan shares, shares in credit unions, etc.); and other accounts receivable and payable.
  - Transactions covered under direct investment are excluded.

- Paragraph 180: Reserve assets covers transactions in assets considered by monetary authorities to be available for use in funding payments imbalances and, in some instances, meeting other financial needs.
  - Items covered: monetary gold, SDRs, reserve position in the Fund, foreign exchange assets (currency, deposits, and securities), and other claims.

- Paragraph 181: Coverage and identification of reserve asset components are linked to an analytic concept, are in part judgmental, and are not always amenable to formal criteria or clear rankings as to conditionality and other considerations.
  - In contrast to the treatment in the fourth edition of the Manual, valuation changes in reserve assets are excluded, along with counterparts to such changes, in the fifth edition.
  - Also excluded are the allocation or cancellation of SDRs, the monetization or demonetization of gold, and counterpart entries. These changes, which do not constitute transactions, are reflected in the international investment position.

### Balance of Payments: Standard Components (selected listing from chapter)
- 1. Current Account
  - A. Goods and services
    - a. Goods
      - 1. General merchandise
      - 2. Goods for processing
      - 3. Repairs on goods
      - 4. Goods procured in ports by carriers
      - 5. Nonmonetary gold
        - 5.1 Held as a store of value
        - 5.2 Other
    - 1.A. b. Services
      - 1. Transportation
        - 1.1 Sea transport
          - 1.1.1 Passenger
          - 1.1.2 Freight
          - 1.1.3 Other
        - 1.2 Air transport
          - 1.2.1 Passenger
          - 1.2.2 Freight
          - 1.2.3 Other
        - 1.3 Other transport
          - 1.3.1 Passenger
          - 1.3.2 Freight
          - 1.3.3 Other
      - 1.A. b.2. Travel
        - 2.1 Business
        - 2.2 Personal*
      - 1.A. b.3. Communications services
      - 1.A. b.4. Construction services
      - 1.A. b.5. Insurance services**
      - 1.A. b.6. Financial services
      - 1.A. b.7. Computer and information services
      - 1.A. b.8. Royalties and license fees
      - 1.A. b.9. Other business services
        - 9.1 Merchanting and other trade-related services
        - 9.2 Operational leasing services
        - 9.3 Miscellaneous business, professional, and technical services*
      - 1.A. b.10. Personal, cultural, and recreational services
        - 10.1 Audiovisual and related services
        - 10.2 Other personal, cultural, and recreational services
      - 1.A. b.11. Government services n.i.e.
- **Memorandum item noted in chapter:** 5.1 Gross premiums

*Italicized line for source attribution below.*

*Source: CHAPTER VIII, _bopman - CHAPTER VIII (PDF).*

### 5.2 Gross claims

### 5.2 Gross claims

### Standard components and classification (selected hierarchy)
- 1.B.Income
  - 1.A. b.1.Compensation of employees
  - 1.A. b.2.Investment income
    - 2.1Direct investment
      - 2.1.1Income on equity
        - 2.1.1.1Dividends and distributed branch profits***
        - 1.A. b.2.2.12.1.12.1.1.2Reinvested earnings and undistributed branch profits***
      - 1.A. b.2.2.12.1.2Income on debt (interest)
    - 1.A. b.2.2.2Portfolio investment
      - 2.2.1Income on equity (dividends)
      - 2.2.2Income on debt (interest)
        - 2.2.2.1Bonds and notes
        - 2.2.2.2Money market instruments and financial derivatives
    - 1.A. b.2.2.3Other investment
- 1.C.Current transfers
  - 1.A. b.1.General government
  - 1.A. b.2.Other sectors
  - 2.1Workers’ remittances
  - 2.2Other transfers
- 2.Capital and Financial Account
  - 1.A.Capital account
    - 1.A. b.1.Capital transfers 
      - 1.1General government
        - 1.1.1Debt forgiveness
        - 1.1.2Other
      - 1.A. b.2.1.2Other sectors
    - 1.2.1Migrants’ transfers
    - 1.2.2Debt forgiveness
    - 1.2.3Other
    - 1.A. b.2.Acquisition/disposal of nonproduced, nonfinancial assets
  - 1.B.Financial account
    - 1.A. b.1.Direct investment
      - 1.1Abroad
        - 1.1.1Equity capital
          - 1.1.1.1Claims on affiliated enterprises
          - 1.1.1.2Liabilities to affiliated enterprises
        - 1.A. b.2.2.31.1.2Reinvested earnings
        - 1.1.3Other capital
    - 1.A. b.2.Portfolio investment
      - 2.1Assets
        - 2.1.1Equity securities
          - 2.1.1.1Monetary authorities
          - 2.1.1.2General government
          - 2.1.1.3Banks
          - 2.1.1.4Other sectors
        - 2.1.2Debt securities
          - 2.1.2.1Bonds and notes
            - 2.1.2.1.1Monetary authorities
            - 2.1.2.1.2General government
            - 2.1.2.1.3Banks
            - 2.1.2.1.4Other sectors
          - 2.1.2.2Money market instruments
            - 2.1.2.2.1Monetary authorities
            - 2.1.2.2.2General government
            - 2.1.2.2.3Banks
            - 2.1.2.2.4Other sectors
          - 2.1.2.3Financial derivatives
            - 2.1.2.3.1Monetary authorities
            - 2.1.2.3.2General government
            - 2.1.2.3.3Banks
            - 2.1.2.3.4Other sectors
      - 2.2Liabilities
        - 2.2.1Equity securities
          - 2.2.1.1Banks
          - 2.2.1.2Other sectors
        - 2.2.2Debt securities
          - 2.2.2.1Bonds and notes
            - 2.2.2.1.1Monetary authorities
            - 2.2.2.1.2General government
            - 2.2.2.1.3Banks
            - 2.2.2.1.4Other sectors
          - 2.2.2.2Money market instruments
            - 2.2.2.2.1Monetary authorities
            - 2.2.2.2.2General government
            - 2.2.2.2.3Banks
            - 2.2.2.2.4Other sectors
          - 2.2.2.3Financial derivatives
            - 2.2.2.3.1Banks
            - 2.2.2.3.2Other sectors
    - 1.A. b.3.Other investment
      - 3.1Assets
        - 3.1.1Trade credits
          - 3.1.1.1General government
            - 3.1.1.1.1Long-term
            - 3.1.1.1.2Short-term
          - 3.1.1.2Other sectors
            - 3.1.1.2.1Long-term
            - 3.1.1.2.2Short-term
        - 3.1.2Loans
          - 3.1.2.1Monetary authorities
            - 3.1.2.1.1Long-term
            - 3.1.2.1.2Short-term
          - 3.1.2.2General government
            - 3.1.2.2.1Long-term
            - 3.1.2.2.2Short-term
          - 3.1.2.3Banks
            - 3.1.2.3.1Long-term
            - 3.1.2.3.2Short -term
          - 3.1.2.4Other sectors
            - 3.1.2.4.1Long-term
            - 3.1.2.4.2Short-term
        - 3.1.3Currency and deposits
          - 3.1.3.1Monetary authorities
          - 3.1.3.2General government
          - 3.1.3.3Banks
          - 3.1.3.4Other sectors
        - 3.1.4Other assets
          - 3.1.4.1Monetary authorities
            - 3.1.4.1.1Long-term
            - 3.1.4.1.2Short-term
          - 3.1.4.2General government
            - 3.1.4.2.1Long-term
            - 3.1.4.2.2Short-term
          - 3.1.4.3Banks
            - 3.1.4.3.1Long-term
            - 3.1.4.3.2Short-term
          - 3.1.4.4Other sectors
            - 3.1.4.4.1Long-term
            - 3.1.4.4.2Short-term
      - 3.2Liabilities
        - 3.2.1Trade credits
          - 3.2.1.1General government
            - 3.2.1.1.1Long-term
            - 3.2.1.1.2Short-term
          - 3.2.1.2Other sectors
            - 3.2.1.2.1Long-term
            - 3.2.1.2.2Short-term
        - 3.2.2Loans
          - 3.2.2.1Monetary authorities
            - 3.2.2.1.1Use of Fund credit and loans from the Fund
            - 3.2.2.1.2Other long-term
            - 3.2.2.1.3Short-term
          - 3.2.2.2General government
            - 3.2.2.2.1Long-term
            - 3.2.2.2.2Short-term
          - 3.2.2.3Banks
            - 3.2.2.3.1Long-term
            - 3.2.2.3.2Short-term
          - 3.2.2.4Other sectors
            - 3.2.2.4.1Long-term
            - 3.2.2.4.2Short-term
        - 3.2.3Currency and deposits
          - 3.2.3.1Monetary authorities
          - 3.2.3.2Banks
        - 3.2.4Other liabilities
          - 3.2.4.1Monetary authorities
            - 3.2.4.1.1Long-term
            - 3.2.4.1.2Short-term
          - 3.2.4.2General government
            - 3.2.4.2.1Long-term
            - 3.2.4.2.2Short-term
          - 3.2.4.3Banks
            - 3.2.4.3.1Long-term
            - 3.2.4.3.2Short-term
          - 3.2.4.4Other sectors
            - 3.2.4.4.1 Long-term
            - 3.2.4.4.2 Short-term
- 1.A. b.4.Reserve assets
  - 4.1Monetary gold
  - 4.2Special drawing rights
  - 4.3Reserve position in the Fund
  - 4.4Foreign exchange
    - 4.4.1Currency and deposits
      - 4.4.1.1With monetary authorities
      - 4.4.1.2With banks
    - 4.4.2Securities
      - 4.4.2.1Equities
      - 4.4.2.2Bonds and notes
      - 4.4.2.3Money market instruments and financial derivatives
    - 4.4.5Other claims

### Selected supplementary information (items highlighted)
- 1.Liabilities constituting foreign authorities’ reserves
  - 1.1Bonds and other securities
    - 1.1.1Monetary authorities
    - 1.1.2General government
    - 1.1.3Banks
    - 1.1.4Other sectors
  - 1.1.2Deposits
    - 1.2.1Monetary authorities
    - 1.2.2Banks
  - 1.1.3Other liabilities
    - 1.3.1Monetary authorities
    - 1.3.2General government
    - 1.3.3Banks
    - 1.3.4Other sectors
- 2.Exceptional financing transactions
  - 2.1Transfers
    - 2.1.1Debt forgiveness
    - 2.1.2Other intergovernmental grants
    - 2.1.3Grants received from Fund subsidy accounts
  - 2.2Direct investment
    - 2.2.1Investment associated with debt reduction
    - 2.2.2Other
  - 2.3Portfolio investment: borrowing by authorities or by other sectors on behalf of authorities—liabilities*
  - 2.4Other investment—liabilities*
  - 2.4.1Drawings on new loans by authorities or by other sectors on behalf of authorities
  - 2.4.2Rescheduling of existing debt
  - 2.4.3Accumulation of arrears
    - 2.4.3.1Principal on short-term debt
    - 2.4.3.2Principal on long-term debt
    - 2.4.3.3Original interest
    - 2.4.3.4Penalty interest
  - 2.4.4Repayments of arrears
    - 2.4.4.1Principal
    - 2.4.4.2Interest
  - 2.4.5Rescheduling of arrears
    - 2.4.5.1Principal
    - 2.4.5.2Interest
  - 2.4.6Cancellation of arrears
    - 2.4.6.1Principal
    - 2.4.6.2Interest
- 3.Other transactions (selected)
  - 3.1Portfolio investment income
    - 3.1.1Monetary authorities
    - 3.1.2General government
    - 3.1.3Banks
    - 3.1.4Other sectors
  - 3.2Other (than direct investment) income
    - 3.2.1Monetary authorities
    - 3.2.2General government
    - 3.2.3Banks
    - 3.2.4Other sectors
  - 3.3Other investment (liabilities)
    - 3.3.1Drawings on long-term trade credits
    - 3.3.2Repayments of long-term trade credits
    - 3.3.3Drawings on long-term loans
    - 3.3.4Repayments of long-term loans
- 4.Services sub-items (selected)
  - 4.1Travel (personal)
    - 4.1.1Health-related
    - 4.1.2Education-related
    - 4.1.3 Other
  - 4.2.1Legal, accounting, management consulting, and public relations
  - 4.2.2Advertising, market research, and public opinion polling
  - 4.2.3Research and development
  - 4.2.4Architectural, engineering, and other technical services
  - 4.2.5Agricultural, mining, and on-site processing
  - 4.2.6Other

### Structure, characteristics, and recording principles (paragraphs 182–194)
- 182.
  - The standard components and coverage of the current account and the capital and financial account are discussed in Chapter 8; coverage of the current account is referred to in paragraphs 152 through 171.
  - As presented in this Manual, the current account is in concordance with SNA coverage of external accounts for goods and services, primary incomes, and current transfers. (See Chapter 3.)
  - The net balance on the current account constitutes an integral part of the measure of an economy’s saving and is a meaningful indicator of an economy’s saving and spending behavior.
  - The net balance on current transactions, net capital transfers, and acquisition or disposal of nonproduced, nonfinancial assets represents the amount of an economy’s net foreign investment or net lending or borrowing vis-à-vis the rest of the world, to the extent that national saving differs from net domestic investment (net capital formation).
- 183.
  - The structure of the current account contains most components traditionally included but has significantly altered classification and specific components from the fourth edition; remains in accord with considerations in Chapter 8, paragraph 143.
- 184.
  - Goods usually comprises the largest category of transactions involving changes of ownership between residents and nonresidents.
  - The scope has been expanded from the fourth edition to include:
    - (i) the movement of goods for processing (when no change of ownership occurs);
    - (ii) the value of repairs on goods (not the value of the movement of goods undergoing repair); and
    - (iii) goods procured in ports by nonresident carriers.
  - Nonmonetary gold is specified under goods as a sub-item to be identified, if feasible, as gold to be held as a store of value or as other (industrial) gold.
- 185–186.
  - Services is the second major category of the current account; production and international trade in services differ from goods.
  - Services covers traditional items (such as travel and transportation) and items becoming more important (communications, financial and computer services, royalties and license fees, and many types of other business services).
  - Transactions in services are clearly separated from income transactions in this Manual, in accordance with the SNA and to facilitate linkage with the CPC.
- 187.
  - Transportation comprises freight services, supporting and auxiliary services, and international carriage of passengers; excludes carriage, within an economy, of nonresident passengers by resident carriers.
  - Freight insurance is included with insurance services (see Chapter 13, paragraphs 255 through 257).
- 188.
  - Travel is demand-oriented and subdivided into business and personal.
- 189.
  - Other services receive increased prominence in the fifth edition; structure and classification relate to importance attached by international bodies (e.g., GATT) and analysts.
- 190.
  - Income comprises compensation of employees and investment income (covering direct investment income and other dividends and interest).
  - This separation tightens links between income and financial account flows and between the balance of payments and the international investment position.
- 191.
  - Current transfers are grouped separately from goods, services, and income; distinction between current transfers and capital transfers aligns with SNA treatment and analytical presentations.
  - Classification examples: receipts from individuals working abroad may be classified as current transfers or compensation of employees depending on length of stay.
- 192.
  - Gross recording principle: in the current account, gross outflows from and gross inflows to the economy should, in principle, be recorded as credits and debits, respectively.
  - Gross recording is emphasized because credit and debit entries for many specific current transactions are seldom causally related.
  - Gross figures are important for:
    - Valuation of the SDR (based on a basket of currencies selected in consideration of issuing countries’ shares in world exports of goods and services and weighted in broad proportion to those shares).
    - Determining the relative quota of an IMF member (one factor is the relative size of a member’s gross transactions in the current account).
- 193.
  - Exceptions to gross recording may be made due to practical difficulty of collecting gross information (e.g., some transportation services) or netting procedures used to derive estimates; gross recording remains the principle.
- 194.
  - Principles and practices dealing with valuation and time of recording for current account transactions are discussed in chapters 5 and 6, respectively, and in chapters 10 through 15.

*Source: _bopman - 5.2 Gross claims*

### CHAPTER IX

### CHAPTER IX

### Coverage and Principles
- Paragraph 195: Goods covers general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, and nonmonetary gold. Change of ownership is the principle determining the coverage and time of recording of international transactions in goods. Exports and imports of goods are recorded at market values at points of uniform valuation, that is, the customs frontiers of exporting economies. Certain exceptions to change of ownership are applied and discussed in subsequent sections.

### Definitions
- Paragraph 196: General merchandise refers, with some exceptions specified later in this chapter, to movable goods for which changes in ownership—actual or imputed—occur between residents and nonresidents.
- Paragraph 197–199: Goods for processing
  - Covers goods exported or imported for processing and that involve two transactions: (i) the export of a good and (ii) the re-import of the good on the basis of a contract and for a fee.
  - Inclusion, on a gross basis, of these transactions under goods is an exception to the change of ownership principle.
  - Processing can consist of any activity performed under contract (oil refining, metal processing, vehicle assembly, clothing manufacture, etc.).
  - Concordance with the SNA concept is noted, but for practical reasons it is recommended that all processing be included under goods.
  - The value of the goods before and after processing should be recorded when the goods are exported and then imported, or vice versa. Corresponding entries in the financial account are required when goods remain in the processing economy after the end of a recording period.
  - Excluded from goods for processing: on-site processing involving an import not followed by an export (these goods are included under general merchandise).
  - Special cases:
    - Goods sent abroad for processing and subsequently sold to a resident of the processing economy are included under exports of general merchandise; payment for processing entered as a debit under services with an adjustment to merchandise export figures to include the value of processing.
    - Goods sent abroad for processing and then sold to another economy: service payment entered under merchanting and other trade-related services; export (including value of processing) recorded under general merchandise.
  - Included (practically) under processing are goods to which some value (e.g., packaging, labeling) is added.
- Paragraph 200: Repairs on goods
  - Covers repair activity performed by residents on movable goods owned by nonresidents (or vice versa) — examples: ships, aircraft, other transportation equipment.
  - Value recorded reflects the value of the repairs (the fee) rather than the gross value of the goods before and after repairs.
  - SNA distinction between repairs on investment goods and other goods is recognized, but recommendation is to include the value of all repairs under goods for practical reasons.
  - Excluded: construction repairs (recorded under construction services), computer repairs (recorded under computer and information services), maintenance performed in ports and airports on transportation equipment (recorded under other transportation services).
- Paragraph 201: Goods procured in ports covers fuels, provisions, stores, and supplies procured by resident or nonresident carriers abroad or in the compiling economy; related services are excluded.
- Paragraph 202: Nonmonetary gold covers exports and imports of all gold not held as reserve assets (monetary gold) by the authorities; treated as any other commodity and, when feasible, subdivided into gold held as a store of value and other (industrial) gold.

### Change of Ownership
- Paragraph 203: Application of change of ownership between a resident and nonresident aligns goods coverage and timing with other balance of payments items. Trade statistics and customs returns are often based on physical movements across frontiers, which may not coincide exactly with ownership changes.
- Paragraph 204: Convention for recording
  - Goods for export are considered to change ownership when the exporter ceases to carry the goods on his books as a real asset (records a sale and corresponding financial items).
  - Goods for import are considered to change ownership when the importer enters them on his books as a real asset (records a purchase and corresponding financial items).
  - This convention promotes consistency between goods and the financial account, and between compiling exporting and importing countries; in practice timing differences may remain.
- Paragraph 205–207: Other exceptions and imputations of change of ownership
  - Transactions between direct investment enterprises and parent companies or other related enterprises should be recorded as if changes of ownership have occurred (paragraph 205), with noted exceptions in paragraph 209.
  - Financial leasing or lease arrangements (for a capital good for most or all of its expected economic life) are presumptive evidence that a change of ownership is intended; a change of ownership is imputed and the full equivalent of the market value of the goods should be recorded under goods, with an offsetting entry in the financial account.
  - Merchanting: when goods are acquired and relinquished without crossing the temporary owner’s frontier, activity is considered merchanting rather than an import and re-export; recommended that the country of temporary owner exclude such goods from goods unless recording periods differ — if recording periods differ, changes in stocks abroad between periods should be shown as imports or reductions in imports.

### Inclusion, in exports or imports, of goods not crossing frontiers (paragraph 208)
- Goods not crossing frontiers are included in exports or imports if changes of ownership occur, except when changes are temporary or not related to significant economic activity.
- Examples of goods that do not cross frontiers but should be included:
  - ships, aircraft, railway rolling stock, gas and oil drilling rigs and production platforms, and other movable equipment not tied to a fixed location
  - nonmonetary gold
  - goods consumed in resident-owned, offshore installations (e.g., gas and oil drilling rigs and production platforms, ships, or aircraft that are operating in international waters or airspace and are purchased from nonresidents)
  - goods salvaged and fish and other marine products caught by ships of the compiling economy and sold directly abroad
  - goods purchased in one foreign country by the government of the compiling economy for its own use in a foreign country
  - goods lost or destroyed after ownership has been acquired by the importer but before the goods have crossed a frontier

### Exclusion, from exports or imports, of goods crossing frontiers but not changing ownership (paragraph 209–210)
- Goods that cross frontiers without changing ownership should not be covered under goods, except as noted elsewhere.
- Principal types of goods that may cross frontiers without changes of ownership:
  - direct transit trade (i.e., goods in transit through an economy)
  - returned exports and imports
  - goods shipped under operational (nonfinancial) leasing arrangements
  - transportation equipment, fishing vessels, gas and oil drilling rigs, and other mobile equipment that leaves or enters an economy without changes of ownership
  - shipments by a specific economy to that economy’s military and diplomatic establishments located outside the territory of the economy
  - goods that cross frontiers and are lost or destroyed before being delivered by exporters
  - temporary exports and imports of goods not for sale (display equipment for trade fairs and exhibitions; art exhibits; animals for breeding, show, or racing; stage and circus equipment)
  - samples of no commercial value
- Paragraph 210: Returned goods — when a contract for sale is not completed and goods are returned, such goods have not changed ownership; statistically, deductions from earlier-export figures should be made in the periods when the goods are returned.

### Goods Classified Under Other Categories (paragraphs 211–214)
- Paragraph 211: Almost all movable goods with changes of ownership between residents and nonresidents are classified under goods; a few specified goods are classified elsewhere.
- Paragraph 212–213: Goods classified under services
  - Some goods are classified under services because data treat them indistinguishably or economics differ; primary types recorded under services include:
    - goods acquired by travelers for their own use (travel), by diplomatic and military missions or agencies or by official personnel (government services n.i.e.), and by nonresident workers (travel)
    - newspapers and periodicals (not in bulk) sent on the basis of direct subscription (computer and information services)
    - goods that do not cross frontiers and are acquired and relinquished within the same recording period (other business services)
  - If goods are acquired in one recording period and relinquished in a later period, they should be recorded as imports in the period acquired and deducted from imports in the period relinquished; differences between acquisition and relinquishment values are entered as merchanting under other business services.
- Paragraph 214: Goods treated as financial items
  - Certain physical items are regarded as financial items and not included under goods. Examples:
    - evidences of financial claims, even though such claims have material form and are movable (e.g., paper money and coin in current circulation and securities that have been issued)
    - monetary gold treated as a financial asset (Monetary gold transactions between authorities of different economies should be included in the financial account.)
    - nonfinancial assets that belong to an enterprise and are considered financial assets for the owner when the owner is not a resident of the economy in which the enterprise operates; changes of ownership resulting from acquisition of these assets by an existing enterprise are treated as financial transactions and not included in goods, except to the extent physically moved.

### Special Types of Goods (paragraph 215)
- Classification of certain physical items as goods is sometimes questioned, but examples of items that should be recorded under goods if they qualify by definition and rules in this Manual include:
  - commodity gold (i.e., nonmonetary gold), silver bullion, diamonds, and other precious metals and stones
  - paper money and coin not in current circulation and unissued securities, all of which should be valued as commodities rather than at face value
  - electricity, gas, and water
  - livestock driven across frontiers

*Source: _bopman - CHAPTER IX*

### CHAPTER X

### CHAPTER X

### Recording of goods: definition and scope
- Goods include:
  - parcel post
  - government exports and imports of goods, including goods financed by grants and loans (other than those exported and imported to and from government agencies and personnel)
  - goods transferred to or from the ownership of a buffer stock organization
  - migrants’ effects
  - smuggled goods, whether or not detected by customs
  - other unrecorded shipments of goods such as gifts and goods of less than stated minimum value. (paragraph 215)

### Time of recording (paragraphs 216–218)
- Principle: record exports and imports when ownership passes between a resident and a nonresident (paragraph 216).
- In practice:
  - Change of ownership is recognized (or proxied) when the two parties record it in their books or accounts (paragraph 216).
  - Physical movement or payment will not necessarily coincide with change of ownership; theoretical adjustments exist but are often difficult to make (paragraph 217).
  - Failure to adjust for timing can be an important source of error in the balance of payments and cause asymmetry between goods components for different countries (paragraph 217).
- Goods on consignment:
  - In principle, included only when ownership changes (paragraph 218).
  - In practice, sometimes recorded when goods cross a frontier; if no change of ownership occurs, subsequent deduction entries must be made similarly to returned exports and imports (paragraph 218).

### Valuation of goods (paragraphs 219–229)
- Valuation principle: market value at the customs frontier of the exporting economy — goods valued free on board (f.o.b.) at that frontier (paragraph 219).
- Market valuation:
  - Concept discussed in Chapter 5 and in UN and GATT valuation standards (paragraph 220).
- Point of valuation and uniformity:
  - Goods cover value of goods and related distributive services at the customs frontier of the exporting economy, including loading on board at that frontier (paragraph 222).
  - Customs bonded warehouses, customs bonded manufacturing plants, and free areas are included within the customs frontier of the controlling economy (paragraph 222).
  - The customs frontier need not coincide with the national boundary and could be located in the interior (paragraph 222).
  - The rule establishes a borderline between goods and distributive services for uniform classification, though it does not produce a uniform point of valuation in a basic economic sense (paragraphs 221, 223).
- Practical issues:
  - Shipping practices and documentation often cover services on both sides of the customs frontier without subdivision, complicating allocation between goods and transportation (paragraph 224).
  - The f.o.b. basis in practice may be treated as free alongside ship (f.a.s.) rather than strict f.o.b., since loading is frequently performed by or for the carrier and excluded from trade statistics on goods while freight data include it (paragraph 225).
  - If goods are delivered to an importer within the exporting economy and shipped to the frontier in a later period, two entries should be made: value at point of delivery and later cost of shipment to the customs frontier; both entries are included in goods (paragraph 226).
- Cross-border service flows and offsets:
  - Inclusion under goods of service flows between nonresidents or between residents of the same economy can occur; offsets should be recorded in transportation to preserve uniform valuation (paragraph 227).
  - Services performed by agents:
    - If an agent’s fee is paid by the exporter, include the fee in the f.o.b. value of the goods regardless of the agent’s residence (paragraph 228).
    - If paid by the importer, include the agent’s fee in the f.o.b. value only if the agent is a resident of the exporting country (paragraph 228).
    - Agents’ fees paid by importers to residents of their own countries and to residents of countries other than the exporting country are excluded from the f.o.b. value (paragraph 228).
    - When a fee is paid by a resident of one country to an agent in another, make an entry in other business services—merchanting and other trade-related services (paragraph 228).
  - Consular fees paid by exporters to consulates of importing economies should not be included in the f.o.b. value at the exporting frontier; consular fees are treated as costs incurred in the importing economy (paragraph 229).

### Transportation: definition, coverage, and exclusions (paragraphs 230–240)
- Definition and coverage (paragraph 230):
  - Transportation covers all transportation (sea, air, and other—including land, internal waterway, space, and pipeline) services performed by residents of one economy for those of another.
  - Services involve carriage of passengers, movement of goods (freight), rentals (charters) of carriers with crew, and related supporting and auxiliary services.
  - Excluded activities:
    - Freight insurance (included in insurance services, Chapter 13)
    - Goods procured in ports by nonresident carriers and repairs of transportation equipment (included in goods, Chapter 10)
    - Repairs of railway facilities, harbors, and airfield facilities (included in construction services, Chapter 13)
    - Rentals (charters) of carriers without crew (included in other business services, Chapter 13)
- Residence issues (paragraph 231):
  - Questions of residence arise when carriers operate outside the economic territory; residence of enterprises discussed in Chapter 4 and paragraphs 80–82 are relevant.

### Passenger services (paragraph 232)
- Coverage:
  - Services in international transportation of nonresidents by resident carriers (credit) and residents by nonresident carriers (debit).
  - Includes passenger services performed within an economy by nonresident carriers.
  - Excluded: passenger services provided to nonresidents by resident carriers within the resident economy (included in travel, Chapter 12).
  - Passenger services include fares (including fares that are part of package tours but excluding cruise fares, which are included in travel), charges for excess baggage, vehicles, or other personal accompanying effects, and expenditures for food, drink, or other items purchased on board carriers.

### Freight services and conventions for recording (paragraphs 233–238)
- Freight services include loading/unloading if contracts require carriers to provide the service (paragraph 233).
  - If loading is performed at the customs frontier by or for the account of the carrier, classify the loading charge as freight; otherwise classify it as part of goods (paragraph 233).
- Effects of the f.o.b. convention (paragraphs 234–236):
  - f.o.b. valuation and the assumption that freight charges are borne by the importing economy determine which transportation services are included in goods versus transportation (paragraph 234).
  - Included in f.o.b. goods: transportation services performed prior to arrival at the exporting economy’s customs frontier.
  - Included in transportation: services performed beyond the exporting economy’s customs frontier (to the importing frontier and within the importing economy to delivery point) and treated as services performed for residents of the importing economy (paragraph 234).
  - Debit entries: transportation services performed by nonresidents in relation to imports when performed after imports are loaded on board at the exporting customs frontier (paragraph 235).
  - Credit entries: transportation services performed by residents in relation to exports when performed after loading on board at the exporting customs frontier; also credits for residents’ services in transport of goods between other countries (paragraph 235).
  - Offsetting resident-resident entries related to freight are not made under this convention to preserve uniform f.o.b. valuation for merchandise; gross freight compilations linked to ex-works valuation may be useful for other purposes (paragraph 235).
  - When imports are valued c.i.f. at the importing frontier, a separate estimate must be made of transportation services performed beyond the exporting frontier to reallocate the transportation element between goods and transportation; errors in this estimation do not affect the combined total of the two items (paragraph 236).
  - If the compiling economy performs some transportation services in connection with imports, estimates must disaggregate these from totals that include similar services for exports or transit; errors produce equal overstatement/understatement of credit and debit sides of transportation without affecting the net amount (paragraph 236).
- Gross flows recorded for transportation (paragraph 237):
  - Record gross flows between residents and nonresidents for transportation services pertaining to goods, including transit trade through a compiling economy, coastal transportation or other transportation between points within an economy, movements to or from entities located outside territories where entities are residents, and goods lost or destroyed after crossing a frontier but before delivery.
- Offsets under transportation for services included in goods (paragraph 238):
  - Credits are included by the importing economy for services performed within the exporting economy’s customs frontier.
  - Debits are included by the exporting economy for services that nonresidents perform within that economy’s customs frontier.

### Rentals of transportation equipment with crew (paragraph 239)
- Covers rentals or operational leases by residents to nonresidents and vice-versa of vessels, aircraft, freight cars, or other commercial vehicles with crews for limited periods (e.g., a single voyage).
- Includes towing and services related to transportation of oil platforms, floating cranes, and dredges.
- These rentals are included, as appropriate, in passenger services or freight services.
- Excluded: financial leases (treated as changes of ownership with related payments recorded under income and amortization) and time charters for longer periods (paragraph 80 relevant) (paragraph 239).

### Supporting and auxiliary services (paragraph 240)
- Covers services provided in ports, airports, and other terminal facilities, including:
  - cargo handling (loading and unloading of containers)
  - storage and warehousing
  - packing and repacking
  - other towing, pilotage, and navigational aid for carriers
  - maintenance and cleaning of transportation equipment
  - salvage operations
  - commissions and agents’ fees associated with passenger and freight transportation
- These services are recorded as other transportation services (paragraph 240).

*CHAPTER X (pages 57–62).*

### CHAPTER XI

### CHAPTER XI

### Nature of Travel Services
- Travel differs from other components of international services in that it is a demand-oriented activity: the consumer (traveler) moves to the location of the provider (residents of the economy visited) for the goods and services desired by the traveler.
- Travel is not a specific type of service but an assortment of services consumed by travelers.
- Travel is not identified as a service in the CPC.
- As used in this Manual, the term travel is synonymous with the term tourism used in the SNA and by the World Tourism Organization (WTO).
- The term traveler is broadly synonymous with the term visitor used by the WTO.

### Definition
- Travel covers primarily the goods and services acquired from an economy by travelers during visits of less than one year in that economy.
- Goods and services are purchased by, or on behalf of, the traveler or provided, without a quid pro quo, for the traveler to use or give away.
- Excluded: the international carriage of travelers, which is covered in passenger services under transportation.
- Traveler definition:
  - An individual staying, for less than one year, in an economy of which he is not a resident for any purpose other than:
    - (i) being stationed on a military base or being an employee (including diplomats and other embassy personnel) of an agency of his or her government,
    - (ii) being an accompanying dependent of an individual mentioned under (i), or
    - (iii) undertaking a productive activity directly for an entity that is a resident of that economy.
  - Expenditures made by individuals covered in (i) and (ii) are recorded under government services n.i.e.
  - Expenditures made by individuals (including seasonal and border workers) covered in (iii) are included under travel.
- Travelers include:
  - Tourists, who spend at least one night in the country visited.
  - Same-day travelers or excursionists, who stay less than twenty-four hours and do not remain overnight. Same-day travelers may be shown as a separate category, or as a memorandum item, by economies in which same-day travelers account for significant transactions.
- The one-year rule does not apply to students and medical patients, who remain residents of their economies of origin even if the length of stay in another economy is one year or more.
  - All expenditures by students and medical patients, including those for educational and health-related purposes (such as tuition, room and board paid for or provided by educational institutions, hospital charges, treatments, physicians’ fees, etc.), are recorded under travel and separately identified, if possible, under Selected Supplementary Information.
  - Fees for services rendered abroad (including provision of correspondence courses) by teachers or doctors are recorded under personal, cultural, and recreational services.

### Types of Travel
- Although the Manual’s standard components for travel include only two items (business and personal), there are distinctions within both categories.

- Business travel:
  - Covers travelers going abroad for all types of business activities: carrier crews stopping off or lying over; government employees on official travel; employees of international organizations on official business; and employees doing work for enterprises that are not resident in the economies in which the work occurs.
  - Business travelers are those who visit an economy for sales campaigns, market exploration, commercial negotiations, missions, meetings, production or installation work, or other business purposes on behalf of an enterprise resident in another economy.
  - Travel refers to personal acquisitions of goods and services (including those for which business travelers are reimbursed by employers) but not the sales or purchases that business travelers may conclude on behalf of the enterprises they represent.
  - Personal expenditures on goods and services by seasonal, border, and other nonresident workers in the economies in which they are employed also are recorded under travel.
  - Government employees and employees of international organizations on official travel are distinguished from employees stationed or living, respectively, in the country; purchases for the latter are included in government services n.i.e.

- Personal travel:
  - Covers travelers going abroad for purposes other than business (e.g., holidays; participation in sports and other recreational and cultural activities; visits with relatives and friends; pilgrimage and religious observances; studies; and health-related purposes).
  - Also includes government employees on leave in economies other than those in which they are residents (or those in which they are stationed) and transit travelers visiting countries en route to other destinations.

### Goods and Services Covered
- All goods and services acquired by travelers from the economies in which they are traveling and for their own use are recorded under travel.
  - These goods and services may be paid for by the traveler, paid for on his or her behalf, or provided to him or her without a quid pro quo (e.g., free room and board received by official visitors or by friends and relatives).
  - In practice, information on goods and services provided without a quid pro quo will not usually be available; if information is available, a contra entry is included under transfers.
- The most common goods and services entered in travel are:
  - lodging,
  - food and beverages,
  - entertainment,
  - transportation within the economy visited (all consumed in the providing economy),
  - gifts, souvenirs, and articles (irrespective of value) purchased for travelers’ own uses and taken out of the economies visited.

*Source: CHAPTER XI of the provided IMF manual content.*

### Chapter 8.

### Chapter 8

### Personal, cultural, and recreational services; Government services n.i.e.
- Personal, cultural, and recreational services between residents and nonresidents are subdivided into:
  - (i) audiovisual and related services: services and associated fees related to production of motion pictures (on film or video tape), radio and television programs (live or on tape), and musical recordings; includes receipts/payments for rentals; fees received by resident actors, directors, producers, etc. (or by nonresidents in the compiling economy) for productions abroad; fees for distribution rights sold to the media for a limited number of showings in specified areas; fees to actors, producers, etc. involved with theatrical and musical productions, sporting events, circuses, etc.; fees for distribution rights (for television, radio, etc.) for these activities.
  - (ii) other cultural and recreational services: services associated with museums, libraries, archives, and other cultural, sporting, and recreational activities; includes fees for services, including provision of correspondence courses, rendered abroad by teachers or doctors.
- Government services n.i.e.:
  - Residual category covering government service transactions (including those of international organizations) not in previous classifications.
  - Includes all transactions by embassies, consulates, military units, and defense agencies with residents of economies in which they are located and all transactions with other economies (excluded are transactions with residents of the home countries represented by the embassies, consulates, etc. and transactions in the commissaries, post exchanges, etc.).
  - Transactions comprise goods and services (office supplies, furnishings, utilities, official vehicles and operation/maintenance thereof, official entertainment) and personal expenditures incurred by diplomats, consular staff, and dependents in the economies in which they are located.
  - Transactions by other official entities (aid missions, government tourist/information/promotion offices) located abroad are included.
  - Transactions associated with aid services provided by non-military agencies that do not give rise to any payments and have offsets in transfers are recorded in this category.
  - Transactions associated with provision of joint military arrangements and peacekeeping forces, such as those of the United Nations, are recorded in government services n.i.e.

### Coverage and definition of Income
- Income covers two transaction types between residents and nonresidents:
  - (i) compensation of employees: paid to nonresident workers (e.g., border, seasonal, and other short-term workers).
  - (ii) investment income: receipts and payments on external financial assets and liabilities (direct investment, portfolio investment, other investment, and receipts on reserve assets).
- Exclusions and special treatments:
  - Income derived from use of tangible assets is excluded from income and classified under leasing or rentals, other business services, or transportation as appropriate.
  - Financial leasing arrangements are evidence that a change of ownership is intended; part of lease payments is construed as income on a financial asset.
  - Holding (capital) gains and losses are not classified as income on investments but as part of the value of the investments; realized holding gains/losses from transactions are included in the financial account; unrealized valuation changes are not included.
  - Premiums or discounts on originally issued debt securities that differ from stated fixed sums should be regarded as negative interest or interest, respectively, rather than holding gains or losses. Values entered in the financial account are the amounts for which securities were actually issued; fixed sums paid at maturity comprise both repayments of original principal amounts and (negative or positive) interest; the interest should be shown as investment income.

### Compensation of employees (definition and recording)
- Compensation of employees comprises wages, salaries, and other benefits (in cash or in kind) earned by individuals—in economies other than those in which they are residents—for work performed for and paid for by residents of those economies.
- Includes employer contributions, on behalf of employees, to social security schemes or to private insurance or pension funds (funded or unfunded) to secure benefits for employees.
- Employees include seasonal or other short-term workers (less than one year) and border workers who have centers of economic interest in their own economies.
- Compensation received by local (host country) staff of embassies and consulates is classified as that paid to resident entities by nonresident entities because embassies and consulates are extraterritorial.
- Compensation paid to employees by international organizations (treated as extraterritorial entities) represents payments to residents from nonresident entities if employees are residents of the economies of location. Employees from other economies employed for one year or more are treated as residents of the economies of location; those employed for less than one year do not involve payments to residents.
- Personal expenditures by nonresident seasonal and border workers and those on installation projects are recorded under travel; taxes paid and pension contributions recorded as current transfers.
- Gross recording of compensation and expenditures is recommended, although practical grounds may limit recording to net income estimates in some instances.
- Distinguishing nonresident workers from migrants (who become residents by virtue of expected stay of one year or more) is often difficult; although aggregate transactions are unaffected in principle, efforts should be made to observe the distinction for comparability across compiling economies.
- Nonresidents’ transactions associated with use of land for non-commercial purposes are usually included indistinguishably under components other than income (for example, travel or government services n.i.e.).

### Investment income: definitions and components
- Investment income (property income in the SNA) covers income derived from a resident entity’s ownership of foreign financial assets.
- Common types:
  - Income on equity (dividends) — distributed earnings allocated to shares and other forms of participation in equity of incorporated private enterprises, cooperatives, and public corporations; includes earnings of branches and other unincorporated direct investment enterprises and direct investors’ shares of earnings of incorporated direct investment enterprises (earnings other than dividends); shares of reinvested earnings attributed to direct investors proportionate to participation in equity; income is imputed to households from net equity in life insurance reserves and pension funds and included under other investment in principle.
  - Income on debt (interest) — income on loans and debt securities (bank deposits, bills, bonds, notes, trade advances); includes discounts in lieu of interest and net interest flows from interest rate swaps.
- Components of investment income are classified as direct investment, portfolio investment, and other investment income.

### Direct investment income
- Covers income accruing to a direct investor resident in one economy from ownership of direct investment capital in an enterprise in another economy; comprises income on equity and income on debt.
- Presented on a net basis for direct investment made abroad and in the reporting economy (receipts less payments for income on equity and income on debt for each).
- Income on equity subdivided into:
  - (i) distributed income (dividends and distributed branch profits).
  - (ii) reinvested earnings and undistributed branch profits.
- Reinvested earnings: direct investors’ shares—in proportion to equity held—of (i) earnings foreign subsidiaries and associated enterprises do not distribute as dividends and (ii) earnings that branches and other unincorporated enterprises do not remit to direct investors. If not identified, all branch earnings are conventionally considered distributed.
- Reinvested earnings may be calculated as entrepreneurial income (net operating surplus) of the direct investment enterprise, plus any income or current transfers receivable, minus any income or current transfers payable (including current taxes payable on income, wealth, etc.).
- Income on debt: interest payable on intercompany debt to or from direct investors from or to associated enterprises abroad. Income on nonparticipating preference shares is treated as interest income and recorded in income on debt.

### Portfolio investment income
- Comprises income transactions between residents and nonresidents derived from holdings of shares, bonds, notes, and money market instruments and associated with financial derivatives.
- Subdivided into income on equity (dividends) and income on debt (interest).
- Financial instrument classification scheme for portfolio investment income is consistent with that in the financial account and the international investment position.
- Subsectoring into domestic institutional sectors (monetary authorities, general government, banks, and other) is shown under Selected Supplementary Information.

### Other investment income
- Covers interest receipts and payments on all other resident claims (assets) on and liabilities to nonresidents.
- Includes, in principle, imputed income to households from net equity in life insurance reserves and in pension funds.
- Classified by domestic sectors previously noted.
- Interest on assets: interest on long- and short-term loans, on deposits, on other commercial and financial claims, and on an economy’s creditor position in the Fund, SDR holdings, and loans to the Fund.
- Interest on liabilities: interest on loans, deposits, other claims, and interest related to use of Fund credit and loans from the Fund; includes interest paid to the IMF on the Fund’s SDR holdings in the General Resources Account.
- Borderline distinctions may arise between interest income and certain commissions and fees (e.g., commitment charges on undrawn funds); these are included in financial services.

### Time of recording of investment income
- Dividends are recorded as of the date payable.
- Interest income is recorded on an accrual basis; if interest is not actually paid, an income entry is recorded under the appropriate instrument and a counterpart entry is made in the financial account to reflect an increase in the claim associated with nonpayment.
- Zero coupon and other deep discounted bonds: the difference between discounted issue price and value at maturity is treated as interest and recorded as accruing over the life of the bond as a series of interest payments rather than recorded when interest is due. If traded prior to maturity, prevailing rates reflecting the difference between the new owner’s cost and value at maturity should be used for subsequent recording of interest. Implementation may be difficult.
- Reinvested earnings of direct investment enterprises are recorded in the balance of payments in the periods in which the income is earned.
- Distributed (remitted) earnings of branches and other unincorporated enterprises are recorded as of the times the earnings are transferred.
- The timing difference arises because reinvested earnings represent net income accruing during a specific period, whereas dividends and remitted branch earnings are discretionary and not attributable to a particular period.

### Measurement and recording of direct investment earnings
- Direct investment earnings are measured on the basis of current operating performance; operational earnings represent income from normal operations and exclude realized or unrealized holding (capital) gains or losses arising from valuation changes (inventory write-offs, gains/losses on plant/equipment from closure, write-offs of intangibles including goodwill, write-offs of R&D expenditures, losses on bad debt write-offs or expropriation without compensation, abnormal provisions for losses on long-term contracts, exchange-rate-related gains and losses).
- Unrealized gains/losses from revaluation of fixed assets, investments, and liabilities and realized gains/losses from disposal of assets/liabilities should be excluded from direct investment earnings.
- Valuation changes from unforeseen obsolescence, catastrophes, and depletion of natural resources treated as holding losses when decreases in values actually occur.
- Countries reporting all-inclusive earnings should collect and publish supplementary information on holding gains and losses and other extraordinary items to enhance international comparability.
- Earnings measured net of income or corporation taxes payable without penalty during the recording period by the enterprise to the economy in which it operates.
- Earnings should be calculated net of any provision for depreciation of fixed capital; depreciation measured by current replacement cost of reproducible fixed assets used up during the accounting period; expected economic life of individual asset should be considered; where only historical cost data available, that may be used.
- Dividends payable to direct investors, remitted branch earnings, and interest payable by direct investment enterprises are recorded gross of any withholding taxes; these taxes are deemed paid by the recipient and transferred to the country of the direct investment enterprise and recorded under transfers.
- Reinvested (undistributed) earnings of branches and other unincorporated direct investment enterprises and direct investors’ shares of earnings not formally distributed of incorporated direct investment enterprises are deemed to provide additional capital and increase an economy’s stock of foreign assets and liabilities. When recorded, entries are made for both direct investment income (credit in current account under direct investment income (income on equity)) and for direct investment capital (debit in the financial account under direct investment–abroad (reinvested earnings)).
- Portfolio investors’ shares in earnings not formally distributed of incorporated direct investment enterprises should not be entered in the balance of payments.
- Direct investors’ shares in net losses (other than holding losses) should be recorded as negative income in direct investment income: compiling economy records losses on residents’ direct investments abroad as negative credits; economy in which the direct investment is made records losses as negative debits.

### Stock dividends, bonus shares, and liquidating dividends
- Stock dividends distributed to nonresident shareholders are construed as capitalization of current earnings and an alternative to distributing cash dividends; recorded in the balance of payments in the same manner as reinvested earnings (investment income in the current account and offsetting equity investment in the financial account).
- General bonus shares represent substitution of one type of equity (paid-up capital or capital stock) for another (reinvested earnings) and thus should not be recorded in the balance of payments (though in some countries accumulated reserves from reinvested earnings are credited to a reserve account that is converted to bonus shares when the account reaches a certain level).
- Liquidating dividends are excluded from investment income because they represent returns of capital contributions rather than remittance of earnings; recorded in the financial account as withdrawals of capital.

* _bopman - Chapter 8_ *

### CHAPTER XIV

### CHAPTER XIV

### Definition and Coverage
- Entries in the balance of payments record when a resident provides a nonresident with a real resource or a financial item; the double-entry system requires an offsetting entry. If the offsetting entry is not a real resource or financial item, it is designated as a transfer.
- The coverage of transfers depends on two decisions:
  - Whether to record provision of economic value when no quid pro quo is received. The Manual recommends showing all economic values, including those without a quid pro quo, provided by residents of one economy to residents of another economy. The statement should also show changes in real resources and financial items resulting from changes of residence (migration) when such changes affect a specific economy and the rest of the world. The statement should exclude similar changes arising from changes in territory of an economy.
  - Separation of benefits into (i) economic values (real resources or financial items) and (ii) benefits on which no economic value is placed (no quid pro quo), i.e., transfers. The intended distinction between intangible real resources (services and income) and transfers that offer no quid pro quo cannot be precisely defined.
- Transfers may be voluntary or obligatory and often reflect benefits that cannot be quantified (for example, improved political or economic relationships; nonspecific administrative, protective, and defense services made available by governments to taxpayers; intangibles involved in carrier registration provided on a compulsory basis).

### Distinction Between Current and Capital Transfers
- The fifth edition identifies transfers as current and capital; only current transfers are included in the current account; capital transfers are included in the capital account component of the capital and financial account.
- Capital transfer characteristics:
  - A transfer in kind is a capital transfer when it consists of (i) the transfer of ownership of a fixed asset or (ii) the forgiveness of a liability by a creditor when no counterpart is received.
  - A cash transfer is a capital transfer when it is linked to, or conditional on, the acquisition or disposal of a fixed asset (for example, an investment grant) by one or both parties.
  - A capital transfer should result in a commensurate change in the stocks of assets of one or both parties.
  - Capital transfers may be large and infrequent but cannot be defined by size or frequency.
- Current transfers:
  - Consist of all transfers that are not transfers of capital.
  - Directly affect the level of disposable income and should influence consumption of goods or services—reducing donor income/consumption possibilities and increasing those of the recipient.
- Classification guidance:
  - A cash transfer could be regarded as capital by one party and current by the other. Recommendation: classify as a capital transfer by both parties if linked to acquisition/disposal of a fixed asset by at least one party.
  - If evidence creates serious doubt that a cash transfer is capital, classify it as a current transfer.
  - The Manual and the SNA contain consistent criteria for distinguishing current and capital transfers.

### Classification of Current Transfers
- Current transfers are classified, by sector of the compiling economy, into two main categories: general government and other sectors.
- General government transfers comprise current international cooperation, covering current transfers—in cash or in kind—between governments of different economies or between governments and international organizations. Included are:
  - Cash transfers between governments for financing current expenditures by the recipient government.
  - Gifts of food, clothing, other consumer goods, medical supplies, etc., associated with relief efforts in the wake of famine, earthquakes, other natural disasters, war, or other actions (Administrative costs directly associated with aid are included.)
  - Gifts of certain military equipment—by convention weapons and equipment to support and deliver weapons are not treated as fixed assets in the Manual or the SNA (Other durable equipment—such as most structures—and transport, hospital, and communications equipment are treated as fixed assets and are included under capital transfers. See paragraph 349.)
  - Annual or other regular contributions paid by member governments to international organizations and regular transfers made as a matter of policy by international organizations to governments.
  - Payments by governments or international organizations to governments for salaries of technical assistance staff and for related costs and expenses.
- Other transfers of general government cover offsets to transactions between governments of compiling economies and nonresidents other than governments and international organizations. Included:
  - On the credit side: current taxes on income, wealth, etc., and other transfers such as social security scheme contributions.
  - On the debit side: social benefits, refunds of taxes, indemnity payments, and pension payments from unfunded plans.
  - Other taxes and subsidies on production, including those implicit under a multiple official exchange rate system, are covered when appropriate.
- Treatment of fines, penalties, fees:
  - Any fines, penalties, or interest charges on late payment of taxes are included in the value of taxes; other fines are treated separately as current transfers.
  - By convention, payments (fees) for carrier registrations or for licenses to fish, hunt, etc., are treated as taxes and included in transfers; other fees, such as those for passports and airport fees to governments, are treated as payments for government services rather than transfers.
- Current transfers between other sectors and nonresidents:
  - Occur between individuals, between nongovernmental institutions or organizations (or between the two), or between nonresident governmental institutions and individuals or nongovernmental institutions.
  - Same basic items as government sector generally applicable, with some component differences.
  - Includes workers’ remittances: current transfers by migrants employed in new economies and considered residents there. A migrant is a person who comes to an economy and stays, or is expected to stay, for a year or more. Persons who work for and stay in new economies for less than a year are considered nonresidents; their transactions are appropriate mainly to compensation of employees.
  - Other current transfers include cash or in-kind transfers for distribution to relieve hardships caused by famine, natural disasters, war, etc., and regular contributions (including membership dues) to charitable, religious, scientific, and cultural organizations; gifts, dowries, inheritances; alimony and other support remittances; tickets sold by, and prizes won from, lotteries; and payments from unfunded pension plans by nongovernmental organizations.
- Other inclusions:
  - Entries on the debit side for private parties for taxes on income, wealth, etc., and social security contributions paid to governments are included among other transfers (these are counterparts to credit-side government entries).
  - Premiums (minus service charges) and claims for non-life insurance are included among current transfers.
- Remittances to finance residents abroad temporarily:
  - A remittance from a resident of a specific economy to finance another resident staying abroad only temporarily is a transaction between residents of the same economy rather than a transfer; goods and services procured abroad by the traveler are recorded under travel.

### Valuation and Timing
- Valuation:
  - Transfer values should equal market values of the real and financial resources offset by the transfers.
  - If no market values exist, value on the basis of explicit costs incurred in providing the resources or amounts that would be received if sold.
  - If donor and recipient view values differently, the value assigned by the donor is used as basis for recording so both statements reflect the same values.
- Timing:
  - Various taxes, fines, and other transfers imposed by one party on another are recorded as of the date of occurrence of underlying transactions or flows that give rise to the liability to pay.
  - For taxes on income, all deductions at source and regular prepayments of income taxes are recorded in the periods in which the deductions and prepayments occur; any final tax liability may be recorded in the accounting period in which the liability is assessed (assessment may occur subsequent to the period when the income is earned in some countries).
  - Other transfers are recorded when the resources offset by the transfers change ownership.

### Structure and Classification of the Capital and Financial Account
- Coverage and relationship to SNA:
  - Standard components of both the current account and the capital and financial account are discussed in Chapter 8. Coverage of the capital and financial account is described in paragraphs 172 through 181.
  - Capital and financial account transactions presented in this Manual are the same as those reflected in the capital and financial accounts of the SNA external accumulation accounts.
  - In the balance of payments, the primary basis for classification of the financial account is functional category (direct investment, portfolio investment, other investment, and reserve assets), while the SNA classification is primarily by type of instrument (monetary gold, currency and deposits, loans, etc.).
  - The structure of the capital and financial account is generally compatible with other IMF statistical systems and consistent with classification of related income components of the current account and with the international investment position.
- Main divisions:
  - The capital and financial account is divided into two main categories: the capital account and the financial account.
  - The capital account covers transactions involving receipt or payment of capital transfers and acquisition or disposal of nonproduced, nonfinancial assets.
  - The financial account covers transactions associated with changes of ownership in foreign financial assets and liabilities of an economy, including creation and liquidation of claims on, or by, the rest of the world.
- Exclusions:
  - All changes that do not reflect transactions are excluded from the capital and financial account, including valuation changes in, or reclassifications of, reserves; changes from territorial or other reclassifications of existing assets; allocation or cancellation of SDRs; monetization or demonetization of gold; write-offs (including expropriation without compensation); and valuation changes reflecting exchange rate or price changes where no change in ownership occurs.
  - When there is a change in ownership and an asset acquired at one price is disposed of at a different price, both assets are recorded at respective market values and the difference (holding (capital) gain or loss) is included in the balance of payments.

### Capital Account (further detail)
- The capital account consists of:
  - (i) capital transfers and
  - (ii) acquisition or disposal of nonproduced, nonfinancial assets.
- Capital transfers are classified primarily by sector (general government and other sectors). Within each, debt forgiveness is specified as a category; migrants’ transfers comprise a category under other sectors.
- Acquisition or disposal of nonproduced, nonfinancial assets includes transactions associated with tangible assets not produced (e.g., land and subsoil assets) and nonproduced intangible assets (e.g., patents, copyrights, trademarks, franchises, leases or other transferable contracts).
- Resident–nonresident transactions in land (including subsoil assets) are deemed to occur between resident units, with the nonresident acquiring a financial claim on a notional resident unit, except where land is purchased or sold by a foreign embassy when the purchase or sale involves a shift of the land from one economic territory to another; in such cases, it is recorded under acquisition or disposal of nonproduced, nonfinancial assets.
- Changes recorded for these assets are total values of assets acquired during the accounting period by residents of the reporting economy less total values of assets disposed of by residents to nonresidents.

### Financial Account — Coverage and Transactions in Assets
- Coverage:
  - Foreign financial assets of an economy consist of holdings of monetary gold, SDRs, and claims on nonresidents. Foreign liabilities consist of indebtedness to nonresidents.
- Identification:
  - To determine whether financial items constitute claims on, or liabilities to, nonresidents, creditor and debtor must be identified as residents of different economies. Denomination currency is irrelevant. Assets must represent actual legally existing claims. Authorization, commitment, or extension of an unutilized line of credit or incurrence of a contingent obligation does not establish a claim; pledging or setting aside an asset does not settle a claim or alter ownership.
- Derivatives:
  - Options and other financial derivatives are included among financial items in accordance with the SNA. These instruments can be valued by market prices of derivatives or of the underlying commitments. Both parties to a derivative contract recognize a financial instrument; one party recognizes a liability and the other a claim. Alternatively, value may be the amount required to extinguish the contract. Derivatives satisfy the definition of foreign financial assets and liabilities.
- Conventions treating some nonfinancial assets as financial claims:
  - Ownership of immovable assets (land and structures) is attributed to residents of the economy in which the assets are located; a nonresident owner thus has a financial claim on a resident entity considered the owner.
  - An unincorporated enterprise operating in a different economy from the owner is considered a resident of the economy in which it operates; all its nonfinancial as well as financial assets are regarded as foreign financial assets for the owner.
  - Goods transferred under a financial leasing arrangement are presumed to have changed ownership, financed by a financial claim (lessor asset, lessee liability). At imputed change in ownership, market value of the good is recorded under goods in the current account, with an offsetting financial account entry. Subsequent leasing payments are split into interest (recorded as investment income in the current account) and debt repayment (recorded in the financial account, reducing lessor asset and lessee liability). The financial asset should be classified as a loan.
- Transactions in assets:
  - Transactions in assets (changes of ownership, including creation and liquidation of claims) most often reflect exchanges of economic values. Financial items may be exchanged for other financial items or for real resources. When a party provides a financial item and receives no economic value in exchange, the offset is a transfer.
  - To establish whether a transaction involving a foreign asset is between a resident and a nonresident, the compiler must know identities of both parties; available information on transferable claims may not permit identification of both parties.

*Source: CHAPTER XIV, _bopman - CHAPTER XIV*

### CHAPTER XVI

### CHAPTER XVI

### Scope and net recording of financial account transactions
- The balance of payments cannot be confined solely to asset transactions between residents and nonresidents because:
  - It may be difficult or impossible to ascertain whether a resident who acquired or relinquished a transferable claim on a nonresident dealt with a resident or a nonresident.
  - The Manual introduces a domestic sectoral breakdown for the portfolio investment and other investment components, which requires recording certain transactions between resident sectors within the economy (although such transactions cancel each other for the total economy).
- Recorded transactions may include:
  - Transactions that involve assets and liabilities and take place between residents and nonresidents.
  - Transactions that involve transferable assets of economies and take place between two residents.
  - Transactions that take place between nonresidents (to a lesser extent).
- Net recording principles:
  - Credit and debit entries for most components of the financial account are generally net.
  - Two or more changes in a specific asset, or changes in two or more different assets classified in the same standard component, are consolidated in a single entry reflecting the net effect of all increases and decreases in holdings during the recording period.
  - Net decreases in claims or other assets and net increases in liabilities are recorded as credits; net increases in assets and net decreases in liabilities are recorded as debits.
  - Net recording is favored because gross data often are not available and net recording reduces prominence of transactions between residents and between nonresidents in the statement.
  - Gross entries may be used in supplementary presentations when appropriate (e.g., securities transactions).

### Offsetting and intra-economy transactions
- Transactions between residents and nonresidents can be offset by transactions:
  - Between residents (e.g., a resident acquires a claim on a nonresident and then transfers the claim to another resident in a different sector during the same recording period; only the increase in the second resident’s holdings is recorded).
  - Between nonresidents.
- For assets, transactions between resident creditors classified in different functional categories or domestic sectors are the most prevalent types that do not cancel each other.
- For liabilities, the identity of the nonresident creditor is a factor only in a few instances (e.g., differentiating between direct investment and other types of capital and in determining regional allocation).

### Reinvested earnings and related entries
- Reinvested earnings of a direct investment enterprise:
  - Are recorded in the current account as being paid to the direct investor as investment income — income on equity.
  - Are recorded in the financial account as being reinvested in the enterprise.
  - Thus, reinvested earnings increase the value of the stock of foreign assets of the direct investor’s economy.
- Distribution to direct investors of earnings in the form of stock dividends (included in investment income — income on equity) results in an increase, shown in the financial account, in the investors’ equity.

### Borderline cases and treatment of changes in contractual terms
- Changes in contractual terms for existing assets (e.g., extension of maturity or government takeover of private liabilities) are construed as transactions because the change requires assent of both parties; the existing claim is considered satisfied by creation of a new one.
- When a transactor intends to dispose of an asset virtually at the same moment ownership is acquired (e.g., arbitrage or certain other dealings):
  - Two possible views:
    - (i) Treat the two changes of ownership as realizations of holding (capital) gains or losses and enter them in the financial account.
    - (ii) Regard the profit or loss as a fee for a service.
  - The Manual recommends treatment (i): entries in the financial account should reflect the holding gain or loss realized on the purchase and sale of financial items at different market prices.

### Classification of financial account items — objectives and bases
- Primary purpose: facilitate analysis by distinguishing categories that exhibit different patterns of behavior related to reasons for changes in financial items (e.g., settling imbalances, reacting to exchange rate movements, making holding gains, exploiting interest differentials, establishing enterprises, obtaining real resources, diversifying investments).
- Bases utilized for classifying financial items:
  - Functional type (primary basis for components of the financial account).
  - Assets and liabilities.
  - Type of instrument.
  - Domestic sector.
  - Original contractual maturity.
  - For direct investment, direction of investment (inward or outward).
- Components can be rearranged and supplemented to meet analytic requirements.

### Functional types of investment (four broad categories)
- Direct investment:
  - Investor seeks a significant voice in management of an enterprise operating outside the investor’s resident economy and typically provides equity capital and possibly other capital.
  - Classified primarily on a directional basis — resident direct investment abroad and nonresident investment in the reporting economy.
  - Subdivided into equity capital, reinvested earnings, and other capital; equity capital and other capital are subdivided into asset and liability transactions.
  - Related income is shown on a net basis in the current account.
- Portfolio investment:
  - Cross-border investment in equity and debt securities (other than direct investment).
  - Coverage expanded to include money market debt instruments and financial derivatives, as well as longer-term debt and equity securities.
  - Type of instrument (equity and debt securities) is the primary classification for portfolio investment.
- Other investment:
  - Residual group comprising many different kinds of investments (e.g., trade credits, loans, currency and deposits, use of Fund credit, loans from the Fund).
  - Functional distinctions are not further drawn; other breakdowns are used to distinguish behavioral differences among components.
- Reserve assets:
  - Foreign financial assets available to and controlled by the monetary authorities for financing or regulating payments imbalances or for other purposes.
  - Consist of monetary gold, SDRs, reserve position in the Fund, foreign exchange, and other claims.
  - Changes in holdings may reflect payments imbalances, official exchange market intervention, and/or other actions.

### Assets, liabilities, instruments, and domestic sector attribution
- Assets vs. liabilities:
  - Distinction is always of interest because terms of borrowing and lending usually differ and have different implications for the balance of payments.
- Type of instrument:
  - For portfolio investment, primary classification is type of instrument: equity and debt securities.
  - Debt securities are subdivided into bonds and notes, money market instruments, and financial derivatives.
- Domestic sector:
  - For assets, the institutional sector of the domestic (resident) creditor is the attributing sector; for liabilities, the institutional sector of the domestic debtor is the attributing sector.
  - The Manual distinguishes four sectors — monetary authorities, general government, banks, and other sectors — for both portfolio investment and other investment.
  - Sector attribution rules:
    - For assets, creditor and transactor sector coincide because the domestic creditor is owner of the asset.
    - For liabilities, the domestic sector of the debtor determines classification because the original nature of the liability is generally considered more significant than the identity of the present holder of the claim.
    - Guarantees and financial intermediation in which the intermediary is not the legal creditor or debtor are not taken into account in determining the domestic sector to which a transaction is attributed (e.g., government-insured trade credits are treated as private trade credits rather than as government lending).

### Original contractual maturity and long- vs short-term distinction
- For other investment:
  - Long-term investment: original contractual maturity of more than one year or with no stated maturity (e.g., equity securities).
  - Short-term investment: investment payable on demand or with an original contractual maturity of one year or less (currency included).
  - These definitions are consistent with those in the SNA.
- Limitations and supplementary options:
  - Innovations in financial markets (e.g., floating rate notes, rollovers) have diminished the usefulness of the original maturity distinction for many purposes.
  - Original maturity may differ from actual holding period; creditor and debtor may view the instrument differently.
  - Original maturity remains widely employed and can be applied without major compilation problems; however, maturity distinction is accorded lesser importance in the Manual and the SNA.
  - Residual maturity bases may be appropriate in some analyses (e.g., banks’ liquidity positions) and can be accommodated in supplementary disaggregations.
- For direct investment, portfolio investment, and reserve assets:
  - Long- and short-term investment are not formally distinguished (direct investment: arbitrary enterprise decisions and lack of meaningful analytic distinction for intercompany flows; portfolio investment and reserve assets: formal maturity not likely to be a significant behavioral factor).

### Liabilities Constituting Foreign Authorities’ Reserves (LCFARs)
- LCFARs are no longer identified among the financial items of the portfolio investment and other investment categories of the financial account.
- Instead, LCFARs are subdivided by instrument and sector in a supplementary presentation and discussed, along with exceptional financing transactions, in supplementary materials.

*IMF — CHAPTER XVI, STRUCTURE AND CLASSIFICATION*

### Chapter 22.

### Chapter 22. Valuation and Timing

### Valuation and timing principles
- Resources included under capital transfers should be valued at the prices that would have been received if the resources had been sold.
- The value assigned by the donor should be used as the basis for recording.
- The forgiveness of debts agreed to by the parties concerned are valued in the same way as other changes in financial assets and liabilities.
- Acquisition or disposal of nonproduced, nonfinancial assets is recorded at the actual transaction value of assets acquired less assets disposed of.
- Changes in financial assets and liabilities that stem from transactions between two parties are valued to reflect the market values of the assets underlying the acquisition or disposition.
- If change of ownership is not obvious, a transaction is considered to take place when the parties enter the transaction (or, for financial items, the claim and liability) on their books.
- For many financial transactions, a value date is often specified to ensure timing agrees in the books of both parties; if no precise date can be fixed, the date on which the creditor receives payment or some other financial claim is decisive.

### Coverage: capital account scope
- The capital account, in this edition of the Manual, comprises capital transfers and acquisition or disposal of nonproduced, nonfinancial assets.
- The former broader category has been expanded and redesignated as the capital and financial account; this chapter encompasses the capital account component only.

### Capital transfers: definition and forms
- A capital transfer may be in cash or in kind.
- Cash capital transfer: linked to, or conditional on, the acquisition or disposal of a fixed asset by one or both parties (e.g., an investment grant).
- Classification rule: a transfer should be classified as a capital transfer for both parties if linked to acquisition or disposal of a fixed asset by even one party; if serious doubt exists, classify as a current transfer.
- In-kind capital transfer consists of:
  - (i) the transfer of ownership of a fixed asset; or
  - (ii) the forgiveness, by mutual agreement between creditor and debtor, of the debtor’s financial liability when no counterpart is received in return by the creditor.
- Criteria for classifying transfers as current or capital are fully consistent with criteria in the SNA.

### Classification of capital transfers
- Capital transfers are classified into two sectoral components:
  - (i) general government; and
  - (ii) other sectors.
- Within each component, debt forgiveness is separately identified.
- In other sectors, migrants’ transfers are separately identified.

### General government: categories and examples
- Under general government, distinguish categories for balance of payments recording, including:
  - Debt forgiveness:
    - When a government creditor entity in one economy formally agrees with a debtor entity in another to forgive all or part of the debtor’s obligations, the amount forgiven is treated as a capital transfer from the creditor to the debtor.
    - The balance of payments reflects a reduction of the liability offset by the transfer.
    - Similar treatment applies when a government entity’s debt is forgiven by a creditor entity in another economy.
  - Investment grants:
    - Investment grants are capital transfers, in cash or in kind, made by governments to nonresident units, or vice versa, to finance all or part of the costs of acquiring fixed assets.
    - Recipients are obliged to use investment grants in cash for purposes of gross fixed capital formation.
    - Investment grants may be paid in installments over a long project; installment payments continue to be classified as capital transfers even if recorded across accounting periods.
    - Investment grants in kind include transfers of transport equipment, machinery, other equipment, and direct provision of buildings or other structures by governments to nonresident units.
    - Most structures used by military establishments are treated as capital transfers; transfers of military equipment with the sole function of being fired are not classified as fixed assets and are included under current transfers.
  - Taxes on capital transfers:
    - Included are taxes levied at irregular and infrequent intervals on values of assets transferred to nonresidents (e.g., inheritance taxes, death duties, gift taxes).
  - Compensation payments:
    - Compensation payments by government to nonresidents for extensive damages to capital assets or serious injuries not covered by insurance policies represent capital transfers (examples: oil spills, major explosions, side effects of drugs).

### Other sectors: migrants, debt forgiveness, other transfers
- Migrants’ transfers:
  - Transfers equal the net worth of migrants (change of residence for at least a year).
  - Household and personal effects and movable capital goods actually transferred are included under goods-general merchandise; offsets should, in principle, be recorded at the time of migration.
  - Enterprises in which migrants retain ownership after departure become foreign claims of the migrants and of the economies to which they have migrated; changes in net financial assets and offsets are recorded at the times of migration.
  - Recognizes practical limitations: few countries can record all assets; some treat possessions and funds accompanying migrants as transfers and record remaining net worth as changes in the stock of claims in the international investment position. Such cases should be separately identified in reports to the IMF.
- Debt forgiveness and other transfers for nongovernment entities:
  - Paragraph 348 (government debt forgiveness) applies with references to “government entity” replaced by “nongovernment entity.”
  - Investment grants, compensation payments, and irregular taxes discussed for government are relevant with references to “government entities” replaced by “nongovernment entities.”
  - Legacies or large gifts to nonresident, nonprofit institutions (NPIs) and exceptionally large donations by households or enterprises to nonresident NPIs for financing gross fixed capital formation are recorded under the investment grant portion of other transfers.

### Acquisition or disposal of nonproduced, nonfinancial assets
- Category comprises acquisition or disposal of:
  - Nonproduced, tangible assets (land and subsoil assets).
  - Nonproduced, intangible assets (patents, copyrights, trademarks, franchises, leases or other transferable contracts).
- Distinguish between use of such assets (recorded under services-royalties and license fees) and purchase or sale of assets (recorded in the intangible assets category of the capital account) if data are available.
- Valuation and timing of capital transfers and acquisition or disposal of nonproduced, nonfinancial assets are discussed in Chapter 16, paragraphs 341 and 342.

### Concept and characteristics of direct investment (beginning of Chapter XVIII)
- Direct investment reflects a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy.
- Lasting interest implies a long-term relationship and a significant degree of influence by the investor on management.
- Direct investment comprises the initial transaction establishing the relationship plus all subsequent transactions between them and among affiliated enterprises.
- The Manual’s concept is broader than the SNA’s foreign-controlled distinction; the Manual emphasizes significant influence (effective voice in management) whereas the SNA emphasizes control.
- Direct investors can derive benefits beyond investment income (e.g., management fees) from long-term associations.
- Direct investment enterprises are defined as incorporated or unincorporated enterprises in which a direct investor resident in another economy owns 10 percent or more of the ordinary shares or voting power (or the equivalent for unincorporated enterprises).
  - Direct investment enterprises include subsidiaries (nonresident investor owns more than 50 percent), associates (an investor owns 50 percent or less), and branches (wholly or jointly owned unincorporated enterprises).
- Qualifications to the 10 percent criterion (not recommended but noted):
  - If investor owns less than 10 percent (or none) but has an effective voice in management, the enterprise may be included.
  - If investor owns 10 percent or more but does not have an effective voice in management, the enterprise may be excluded.
  - Countries applying such qualifications should identify the aggregate value of transactions to facilitate international comparability.
- Special purpose entities (SPEs):
  - Recommended to be included as direct investment enterprises if they meet the standard criteria.
  - For SPEs whose sole purpose is financial intermediation, direct investment transactions are limited to those associated with permanent debt and equity.
  - Countries employing other treatments of SPEs should separately identify the value of SPE transactions as a group in standard components to permit consistent international comparisons.
- Direct investors:
  - May be individuals; incorporated or unincorporated private or public enterprises; associated groups of individuals or enterprises; governments or government agencies; estates, trusts, or other organizations resident in an economy other than that of the direct investment enterprise.
  - Members of an associated group who, through combined ownership of 10 percent or more, are deemed to have influence on management similar to an individual investor with the same degree of ownership.
- Direct investment capital:
  - For the economy in which the investment is located, includes funds provided by the direct investor and funds provided by other direct investment enterprises associated with the same direct investor.
  - For the economy of the direct investor, includes only funds provided by the resident investor.
  - Does not include funds provided by or received from other sources for which the direct investor merely arranges or guarantees repayment.
  - Components (recorded on a directional basis) are equity capital, reinvested earnings, and other capital associated with various intercompany debt transactions.
  - Equity capital comprises equity in branches, all shares in subsidiaries and associates (except nonparticipating, preferred shares treated as debt securities under direct investment-other capital), and other capital contributions.

*Source: Chapter 22. Valuation and Timing, _bopman - Chapter 22.*

### CHAPTER XVIII

### CHAPTER XVIII

### Undistributed (Reinvested) Earnings and Direct Investment Capital
- Undistributed (reinvested) earnings consist of the investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor.
- If such earnings are not identified, all branch earnings are conventionally considered to be distributed.
- Undistributed earnings result in additions to direct investors’ equity in subsidiaries and branches and are included as direct investment capital transactions in amounts equal to (and with opposite sign to) the corresponding entries recorded under direct investment income. (See paragraphs 278, 288, and 321.)

### Other Direct Investment Capital (Intercompany Debt)
- Other direct investment capital covers borrowing and lending of funds—including debt securities and suppliers’ credits—between direct investors and subsidiaries, branches, and associates.
- Borrowing and lending are reflected in intercompany claims and liabilities (receivables and payables), respectively.
- Both loans to subsidiaries from direct investors and loans from subsidiaries to direct investors are included.
- In contrast to the treatment of other investment, no distinction is made between short- and long-term investment. (Paragraph 370)

### Reverse Investment and Cross Participation
- Reverse investment or cross participation occurs when a direct investment enterprise has an interest in its direct investor; that interest is regarded as an offset to capital invested by the direct investor (i.e., as disinvestment). (Paragraph 371)
- Recording conventions:
  - For the economy of the direct investment enterprise, reverse investment in the form of equity is recorded under direct investment-in reporting economy-equity capital-claims on direct investors.
  - For the economy of the direct investor, reverse investment in the form of equity is recorded under direct investment-abroad-equity capital-liabilities to affiliated enterprises.
  - Reverse investment in the form of other instruments should be recorded under direct investment-in reporting economy-other capital or direct investment-abroad-other capital.
- When the equity participation is at least 10 percent in both directions, two direct investment relationships are established and transactions are recorded as direct investment claims and liabilities in both directions; that is, as direct investment-in reporting economy and as direct investment-abroad, for each economy as appropriate. (Paragraph 371)

### Intercompany Transactions Involving Financial Intermediaries and SPEs
- Intercompany transactions between affiliated banks (depository institutions) and affiliated financial intermediaries (e.g., security dealers)—including SPEs with the sole purpose of serving as financial intermediaries—recorded under direct investment capital transactions are limited to transactions associated with permanent debt (loan capital representing a permanent interest) and equity (share capital) investment or, in the case of branches, fixed assets. (Paragraph 372)
- Deposits and other claims and liabilities related to usual banking transactions of depository institutions and claims and liabilities of other financial intermediaries are classified under portfolio investment or other investment as appropriate.
- The stock of foreign assets and liabilities of banks and other financial intermediaries (international investment position) should be treated in a parallel manner.
- Transactions through SPEs (with the exceptions noted in paragraphs 365 and 372) are included in direct investment capital transactions, and the related stocks of assets and liabilities are covered in the direct investment position. (Paragraphs 372–373)

### Creation, Dissolution, and Reclassification of Direct Investment
- Direct investment capital transactions include those that create or dissolve investments as well as those that maintain, expand, or reduce investments. (Paragraph 374)
- When a nonresident who previously had no equity in an existing resident enterprise purchases 10 percent or more of the shares or voting power of that enterprise from a resident, the market value of equity holdings acquired and any other capital invested should be recorded as direct investment.
- When a nonresident holds less than 10 percent of the shares of an enterprise as a portfolio investment and subsequently acquires additional shares resulting in a direct investment interest (10 percent or more), only the purchase of additional shares is recorded as a direct investment transaction.
- Holdings previously acquired (when below 10 percent) are not recorded in the balance of payments but are reflected in a reclassification, from portfolio investment to direct investment, in the international investment position. (Paragraph 374)

### Extent of Net Recording
- Direct investment is often referred to as an asset for the economy of the direct investor and as a liability for the economy in which the direct investment enterprise operates; however, investor and enterprise have claims on, or liabilities to, each other. (Paragraph 375)
- The Manual recommends recording direct transactions in equity capital and other capital (intercompany debt) for assets (claims) and liabilities by making separate entries for the change in claims of direct investors on, and the change in liabilities to, affiliated enterprises.
- Entries are made under direct investment-abroad and vice versa for direct investment-in reporting economy for both balance of payments and international investment position recording.
- Direct investment income on equity and debt is shown on a net basis for each direction. (Paragraph 375)

### Valuation of Flows and Stocks
- Market price is the conceptual basis for valuation of flows and stocks, including those for direct investment, in the international accounts. (See Chapter 5, paragraphs 97–103; Chapter 5, paragraphs 107–108; Chapter 23.) (Paragraph 376)
- In practice, enterprise balance sheet book values are often used to determine the value of the stock of direct investment because they are often the only readily available source.
- Balance sheet values may reflect historical cost or interim but not current revaluation; when balance sheet values are revalued to current market value, they are effectively market values.
- Compilers are encouraged to collect data on a current market value basis to narrow the gap between principle and practice.
- Countries that publish data based on market values derived indirectly should, when feasible, also publish data collected on a balance sheet (book value) basis if the two types of data differ. (Paragraph 377; see paragraph 467 for related discussion.)

### Other Special Cases of Direct Investment Enterprises
- Insurance enterprises: Transactions of insurance companies are treated in the same manner as industrial and commercial enterprises, except that technical reserves (e.g., actuarial reserves against outstanding risks, prepayments of premiums, reserves for with-profits insurance, and reserves against unsettled claims) of insurance enterprises are excluded from the stock of direct investment. (Paragraph 379)
- Construction enterprises: Construction enterprises involved in work undertaken in other economies may be classified as either direct investment activity or as export of services. Classification and attribution of production are linked to residency criteria discussed in Chapter 4, paragraph 78. (Paragraph 380)
- Offshore enterprises: The residency of offshore enterprises—including those engaged in assembly of components manufactured elsewhere, those engaged in trade and financial operations, and those located in special zones—is attributed to the economies in which the enterprises are located. (See paragraph 79.) (Paragraph 381)
- Private, nonbusiness real estate investment (e.g., holiday and other residences owned by nonresidents for personal use or leased to others) is, in principle, included in direct investment. (Paragraph 382)
- Expenditures for exploration of minerals and other natural resources by direct investment enterprises are treated as capital expenditures (fixed capital formation) according to the SNA; inward investment flows for such expenditures are recorded in the balance of payments. If exploration is unsuccessful and leads to shutdown, no further balance of payments entries are recorded; instead, a negative stock adjustment is made in the direct investment position of the direct investor in the host economy, with an equal reduction in the liability position of that economy. Both adjustments fall under Other Adjustments in the international investment position. (Paragraph 383; see table at end of Chapter 23.)

### Selected Supplementary Information for Analytical and Policy Purposes
- Additional aspects of direct investment that may be of interest—particularly in the host economy—include:
  - values of total assets of enterprises;
  - complete balance sheets and income statements;
  - composition of sales and of external financing;
  - employment and industry activity of direct investment enterprises and of direct investors;
  - geographic allocation of activities (see Chapter 24);
  - value added or gross product of subsidiaries in relation to total GDP of the economies involved;
  - country of the ultimate beneficial owner.
- Such information, along with balance of payments and international investment position data, may be collected in enterprise surveys. (See the Guide.) (Paragraph 384)

*Source: CHAPTER XVIII of the provided IMF chapter PDF.*

### introduction of many new financial instruments within

### _bopman - introduction of many new financial instruments within

### Revisions to portfolio investment coverage
- The Manual significantly revises the coverage and classification of portfolio investment (paragraph 386).
- The formal distinction between long- and short-term investment is not made for portfolio investment; previously long-term = original maturity of more than one year or no stated maturity, short-term = original maturity of one year or less or on demand (paragraph 386; see paragraphs 336 through 339 referenced).
- Original maturity is now less important for many market participants, prompting inclusion of additional instruments within portfolio investment; in previous editions short-term instruments were excluded and treated as other capital (paragraph 386).
- Classification changes reflect financial market developments and efforts to improve links with the SNA and other IMF statistical systems (paragraph 386).

### Classification and definitions of instruments
- Major components of portfolio investment: equity securities and debt securities, classified under assets and liabilities (paragraph 387).
- Debt securities subdivided into:
  - bonds and notes,
  - money market instruments,
  - financial derivatives that include a variety of new financial instruments (paragraph 387).
- Equity securities:
  - cover claims to residual values of incorporated enterprises after creditors (paragraph 388).
  - include shares, stocks, participation certificates, American Depositary Receipts, preferred stock or shares that provide participation on dissolution, mutual funds and investment trusts (paragraph 388).
  - preferred shares that do not provide participation are treated differently (paragraph 388 reference to paragraph 390).
- Debt securities:
  - cover (i) bonds, debentures, notes, etc.; (ii) money market or negotiable debt instruments; and (iii) financial derivatives or secondary instruments such as options (paragraph 389).
- Bonds, debentures, notes, etc.:
  - give unconditional right to fixed or contractually determined variable money income; payment not dependent on debtor earnings (paragraph 390).
  - include nonparticipating preferred stocks or shares, convertible bonds, bonds with optional maturity dates where latest maturity is more than one year after issue (paragraph 390).
  - include negotiable certificates of deposit with maturities of more than one year; dual currency bonds; zero coupon and other deep discounted bonds; floating rate bonds; indexed bonds; asset-backed securities such as collateralized mortgage obligations and participation certificates (paragraph 390).
  - mortgages are not classified as bonds but are included under loans (paragraph 390).
- Money market securities:
  - generally give unconditional right to receive a stated, fixed sum on a specified date and are traded at a discount dependent on interest rate and time to maturity (paragraph 391).
  - include treasury bills, commercial and financial paper, bankers’ acceptances, negotiable certificates of deposit with original maturities of one year or less, and short-term notes issued under note issuance facilities (NIFs) even though the facility is typically longer-term (paragraph 391).
  - repurchase agreements are nonnegotiable and classified under loans in other investment (paragraph 391).
- Derivatives (secondary instruments):
  - give qualified right to receive economic benefit in form of cash, a primary financial instrument, etc., at a future date and are linked to specific financial instruments, indicators, or commodities (paragraph 392).
  - include options on currencies, interest rates, commodities, indices; traded financial futures; warrants; currency and interest rate swaps (paragraph 392).
  - when tradable and with market value, they are treated as actual financial assets or liabilities and recorded in the financial account (paragraph 392).

### Treatment and recording of derivatives and related instruments
- Transactions in derivatives are treated as separate financial transactions rather than integral parts of underlying transactions to avoid measurement asymmetries and reflect different counterparties and motives (paragraph 393).
- Equity and debt securities are further subdivided by institutional sector of the resident creditor (for assets) and resident debtor (for liabilities); supplementary subdivisions by nonresident sector, new issues vs transactions in outstanding issues, redemptions, and currency denomination may be analytically useful (paragraph 394).

### Selected recording issues and instrument-specific treatments
- Expanded coverage raises recording issues for money market, derivative, and innovative long-term securities; selected instruments are discussed in subsequent paragraphs (paragraph 395).
- Zero coupon and deep discounted bonds:
  - treated as single payment, long-term securities sold at a discount with full return at maturity (paragraph 396).
  - the difference between discounted issue price and maturity price is treated as interest income and recorded as accruing (i.e., converted into a series of monthly quaterly or annual payments) over the life of the bond; not recorded when due for payment (paragraph 396).
  - offset to interest income entered under debt securities in the financial account reflecting reinvestment (paragraph 396).
  - secondary market trades may include realized holding gains or losses in addition to accrued interest; changes included in financial account entries for purchase and sale at market prices (paragraph 396).
  - prevailing interest rates reflecting new owner’s cost and value at maturity should be used for subsequent interest recording (paragraph 396; see paragraph 283).
- Index-linked securities:
  - coupon payments linked to an index are treated as interest income as with variable interest rate assets (paragraph 397).
  - when principal is indexed, issue price is recorded as principal; change in value from indexation is treated as interest income and should be estimated and recorded over life of the security with the offset recorded under debt securities in the financial account (paragraph 397).
- Notes under NIFs:
  - NIF is usually a medium-term arrangement of five to seven years; notes issued under NIFs are short-term instruments (e.g., three to six months) issued under a contractual commitment with banks to underwrite or provide stand-by credits (paragraphs 399–400).
  - creation of NIFs does not require financial account entries because NIFs are contingent; when notes are issued and sold under an NIF the sale is recorded as liability for the borrower and asset for buyer; repayments entered accordingly (paragraph 400).
  - fees associated with creation/operation of NIFs or bank placements of notes are entered in financial services in the current account (paragraph 400).
  - discounts or premiums on notes purchased are treated as interest income or negative interest income at times of purchase (paragraph 400).
- Options and warrants:
  - options give purchaser right, not obligation, to buy (call) or sell (put) an instrument at a strike price within a time span; buyer pays a premium to seller, which is treated as seller’s liability representing current cost to buy out contingent liability (paragraphs 401–402).
  - premium conceptually includes purchase price of a financial asset and a service charge; if service element identifiable it is entered under financial services, otherwise full premium recorded as acquisition of financial asset by buyer and incurrence of liability by seller (paragraph 402).
  - subsequent trading of options recorded in financial account; exercise leading to delivery recorded as acquisition/sale of underlying asset at prevailing market price with offset extinguishing option contract; closing out prior to delivery similarly recorded (paragraph 402).
  - initial margin payments and subsequent changes recorded as assets and liabilities under other investment—currency and deposits in the financial account; when reflected in transactions in traded options they are recorded under option transactions in the financial account (paragraph 402).
  - warrants are tradable instruments giving holder right to buy from issuer a number of shares or bonds under specified conditions; issuer considered to have incurred a liability; treatment same as other options (paragraphs 403–404).
- Swaps:
  - swaps exchange streams of payments on the same amount of indebtedness over time; main types are interest rate swaps and currency swaps (paragraph 405).
  - balance of payments entries: streams of interest payments recorded on a net basis in the current account; streams of principal repayments recorded in the financial account (paragraph 406).
  - payments to third parties arranging swaps are recorded under financial services (paragraph 406).
- Futures and forward rate agreements (FRAs):
  - traded financial futures recorded in the financial account similarly to options; nontraded financial futures recorded under other assets or other liabilities components of other investment (paragraph 407).
  - an FRA is an agreement on an interest rate for settlement on a notional principal that is never exchanged; settlement payment (difference between agreed and prevailing market rate) recorded as a transaction in the balance of payments and as interest income in the current account; no financial account entries because no actual underlying asset is exchanged (paragraph 408).

### Valuation and transaction recording
- Transactions classified as portfolio investment are entered at market prices; valuation changes while securities remain held are omitted from transaction entries (paragraph 409).
- The difference between market values of assets outstanding at the beginning and end of a period may include (i) transactions valued at market price during the period and (ii) valuation changes including those in assets acquired or disposed of during the period (paragraph 409).
- Changes in holdings reported by transactors or agents may include service charges; adjustments are made in entries to portfolio investment and the charges are included in financial services (paragraph 410).

### Coverage and classification of other investment
- Other investment is a residual category including all financial transactions not covered in direct investment, portfolio investment, or reserve assets (paragraph 411).
- Assets and liabilities for other investment are classified primarily on an instrument basis; secondary classification by debtor/creditor sector: monetary authorities, general government, banks, and other sectors (paragraph 412).

*Italic: _bopman - introduction of many new financial instruments within*

### Appendix 2.) In contrast to direct investmentand

### _bopman - Appendix 2.) In contrast to direct investmentand

### Other investment — instrument classification and recording
- The maturity distinction (long-term and short-term) is a third-level basis of classification. (paragraph 413)
- Instrument subclasses for other investment align closely with SNA categories for financial assets. (paragraph 413)
- The instrument classification comprises:
  - trade credits,
  - loans (including the use of Fund credit and loans from the Fund),
  - currency and deposits (both transferable and other),
  - other assets and liabilities (for example, miscellaneous accounts receivable and payable). (paragraph 413)

- Trade credits:
  - Consist of claims and liabilities from direct extension of credit by suppliers and buyers for transactions in goods and services and advance payments for work in progress associated with such transactions. (paragraph 414)
  - Loans to finance trade are not included as trade credits; these are classified under loans. (paragraph 414)
  - In absence of actual data, trade credits may be measured by the difference between entries for underlying transactions in goods and services (recorded as of dates when ownership changes) and entries for payments related to these transactions. (paragraph 414)
  - Trade credits and advances, although frequently short-term, are subdivided into short- and long-term categories. (paragraph 414)

- Loans:
  - Comprised of financial assets created via direct lending where lender receives no security evidencing the transaction or receives a non-negotiable document. Included are loans to finance trade, other loans and advances (including mortgages), use of Fund credit and loans from the Fund, etc. (paragraph 415)
  - Financial leases and repurchase agreements are covered under loans even if not legally loans. (paragraph 415)
  - Loans are subdivided into long- and short-term categories. (paragraph 415)
  - Long-term loans and trade credits are recorded on a net basis; recording of gross flows for drawings and repayments is recommended as supplementary information. (paragraph 416)

- Financial leases:
  - Included under loans because arrangements are presumptive evidence that a change in ownership of goods has occurred. (paragraph 417)
  - At the time of imputed change in ownership, market value of goods is recorded and counterpart entries made in the financial account. Subsequent lease payments are divided into interest (current account) and principal (financial account). (paragraph 417)

- Repurchase agreements (repos):
  - Defined as sale of securities with commitment to repurchase same or similar securities at fixed future price; usually very short-term. (paragraph 418)
  - Economically similar to collateralized loans; treated as newly created financial assets that are collateralized loans rather than transactions in underlying securities. (paragraph 418)
  - Repos are classified under loans—unless repos involve bank liabilities and are classified under national measures of broad money, in which case classified under currency and deposits. (paragraph 418)
  - National compilers may use alternative treatments for legal, institutional reasons; such instances should be separately identified and reported to the IMF if feasible. (paragraph 418)

- Use of Fund credit and loans from the Fund:
  - Comprises a member country’s drawings on the Fund—other than those drawn against the country’s reserve tranche position. (paragraph 419)
  - Includes purchases and borrowings under stand-by, extended, structural adjustment, enhanced structural adjustment, and Systemic Transformation Facility arrangements, together with Trust Fund loans. (paragraph 419)
  - A reduction in the Fund’s holdings of a member’s currency in excess of the member’s quota in the Fund minus the member’s reserve tranche position reflects a repayment of the use of Fund credit. (paragraph 419)

- Currency and deposits:
  - Currency consists of notes and coin in circulation and commonly used to make payments; commemorative coins and uncirculated banknotes are excluded. (paragraph 420)
  - If both domestic currency held by nonresidents and foreign currency held by residents serve payment purposes, identifying each separately as supplementary information is useful. (paragraph 420)
  - Deposits comprise transferable deposits and other deposits. Transferable deposits are exchangeable on demand at par without restriction or penalty and commonly used to make payments. (paragraph 421)
  - Other deposits include claims (other than transferable deposits) reflecting evidence of deposit: non-transferable savings deposits, time deposits, and shares (evidence of deposit) redeemable on demand or short notice in savings and loan associations, credit unions, building societies, etc. (paragraph 421)

- Other assets and liabilities:
  - Cover items other than loans and currency and deposits, e.g., capital subscriptions to international nonmonetary organizations, miscellaneous accounts receivable and payable. (paragraph 422)

- Transactions of banks and other financial intermediaries in direct investment relationships:
  - Included in portfolio investment or other investment; loans and deposits of such institutions are included under those components. (paragraph 423)

### Reserve assets — concept, identification, and coverage
- Reserve assets are the fourth major functional category of the financial account and consist of external assets readily available to and controlled by monetary authorities for:
  - direct financing of payments imbalances,
  - indirectly regulating magnitudes of such imbalances through intervention in exchange markets,
  - and/or other purposes. (paragraph 424)
- Reserve assets, as defined in this Manual, comprise monetary gold, SDRs, reserve position in the Fund, foreign exchange assets (currency and deposits and securities), and other claims. Securities that do not satisfy reserve asset requirements are included in direct investment and portfolio investment. (paragraph 424)

- Substitute external resources and conditional items:
  - Other substitute external resources, credits, and conditional items—virtually second-line reserves—can be mobilized by monetary authorities; thus reserve assets’ relative significance within total international liquidity may have narrowed but still play a key role. (paragraph 425)
  - Authorities may use Fund credit and loans from the Fund, encourage foreign borrowing by other sectors, alter exchange rates, or allow floating; acquisition or use of reserve assets does not necessarily reflect degree or size of payments imbalance. Authorities may hold reserves to maintain confidence, satisfy legal requirements, or serve as basis for foreign borrowing. (paragraph 425)
  - External liquidity available to authorities reflects a broader range of items than the components listed as reserve assets. (paragraph 425)

- Identification challenges:
  - Readily observable characteristics of claims (legal ownership, marketability, currency, maturity) are insufficient to establish availability to monetary authorities. Reserve assets always refer to assets that actually exist; contingent claims under agreements in force (e.g., swap lines, credit lines, potential Fund credit) do not constitute existing claims. (paragraph 426)
  - Assets pledged, committed, earmarked, set aside, sold forward, or encumbered remain existing assets and are not precluded from inclusion on those grounds alone; supplementary information on such arrangements is useful. (paragraph 426)
  - Two issues for identification: (i) which assets, in addition to those actually owned, are at effective disposal of monetary authorities; (ii) of assets controlled by authorities, which are available for use if necessary. Judgement is required. (paragraph 427)

- Effective control:
  - Appraised with reference to institutional framework in individual economies. In the narrowest sense, authorities control only assets they legally hold title to; in the broadest sense, almost any resident-owned asset may ultimately be subject to authorities’ control. Concept should encompass assets over which authorities exercise direct and effective control. (paragraph 428)
  - Test of control applied strictly: generally only foreign claims actually owned by monetary authorities would be included as reserves. Acquisition of assets through statutory power maintained solely on stand-by basis is not effective control. Ownership is not necessary for control if, e.g., banks hold title but may deal in such assets only on terms specified by authorities. (paragraph 429)
  - Except in unusual circumstances, direct and effective control is not to be construed as extending beyond assets owned by depository institutions. Authorities should be able to provide data on assets they control but do not own. (paragraph 430)

- Availability for use:
  - Dependence on conditionality and liquidity/marketability. Owned assets such as monetary gold, SDRs, and reserve positions in the Fund that are immediately available are the most unconditional. (paragraph 431)
  - A pragmatic approach: consider whether there is expectation, backed by reasonable degree of assurance, that conditions could be satisfied if assets needed to be used. (paragraph 431)

- Selected cases and conventions:
  - Reserve assets in excess of immediate requirements invested in World Bank obligations remain classified as reserve assets; direct, long-term loans for development are not reserve assets. (paragraph 432)
  - Net creditor positions in regional payments arrangements with reciprocal lines requiring prompt settlement (e.g., monthly or quarterly) are construed as reserve assets. Net asset balances in bilateral payments agreements, subscriptions to international nonmonetary organizations, assets redeemable only in inconvertible currencies, and assets with uses blocked by issuers are not considered reserve assets. (paragraph 432)
  - Working balances of the government qualify fully as reserve assets. Committed assets cannot be excluded because they exist to meet requirements. A readily repayable loan to the Fund comprises a reserve asset. Bank transfers to authorities prior to accounting dates that are effectively committed may distort reserve assets as of that date and may justify seasonal adjustment. (paragraph 433)
  - Assets under reciprocal facilities (swap arrangements) for temporary exchange of deposits between central banks are treated as reserve assets for acquiring central bank; reciprocal deposits by partner central bank are also reserve assets. Gold swaps treated similarly. Central bank acquisition of foreign exchange from domestic bank in exchange for national currency deposit with commitment to reverse is treated as increase in reserve assets and corresponding increase in central bank liabilities. (paragraph 434)
  - Assets not actually owned by monetary authorities do not usually qualify, but may if authorities exercise effective control with distinctive characteristics (e.g., temporary transfers to private banks with inducements). (paragraph 435)

### Exclusions, valuation changes, and classification of reserve components
- Exclusion of valuation changes and other adjustments:
  - This fifth edition excludes all changes in reserve assets not attributable to transactions (value changes from price fluctuations, changes from creation of reserve assets such as monetization or demonetization of gold and allocation or cancellation of SDRs, and counterparts offsetting such changes). These adjustments are reflected in the international investment position rather than balance of payments statements. (paragraph 436)

- Classification implications:
  - Individual elements of reserve assets are largely interchangeable functionally, but component changes may have differing implications for global liquidity and adjustment analysis. (paragraph 437)

- Monetary gold:
  - Defined as gold owned by authorities (or others subject to effective control of authorities) and held as a reserve asset. Other gold is treated as any other commodity. Transactions in monetary gold occur only between monetary authorities and counterparts in other economies or international monetary organizations. Monetary gold is a reserve asset for which there is no outstanding financial liability. (paragraph 438)
  - Monetization (adding monetary gold by acquiring commodity gold) and demonetization (releasing monetary gold for nonmonetary purposes) are treated as reclassification of gold; such increases or decreases are not shown in the balance of payments but are reflected in the international investment position. If monetized/demonetized gold is acquired from or sold to a nonresident, the transaction is recorded as an import or export under goods in the current account and as a credit or debit under the financial item used/received. (paragraph 439)

- SDRs:
  - SDRs are international reserve assets created by the International Monetary Fund to supplement other reserve assets and are periodically allocated to IMF members in proportion to their respective quotas. (paragraph 440)
  - SDRs are not considered liabilities of the Fund; IMF members to whom SDRs are allocated do not incur actual (unconditional) liabilities to repay SDR allocations. The Fund determines the value of SDRs daily by summing, in U.S. dollars, the values—which are based on market exchange rates—of a weighted [...] (paragraph 440)

*Source: _bopman - Appendix 2.) In contrast to direct investmentand*

### CHAPTER XXI

### CHAPTER XXI

### Reserve assets: definitions and components
- Monetary gold is generally construed to be at least 995/1000 pure.
- SDRs:
  - Are a basket of currencies; the basket and weights are subject to revision from time to time.
  - Can be used to acquire other members’ currencies (foreign exchange), to settle financial obligations, and to extend loans.
  - Changes in SDR holdings of monetary authorities arise through:
    - (i) transactions involving SDR payments to or receipts from the Fund, other participants in the SDR Department of the Fund, or other holders, or
    - (ii) allocation or cancellation.
  - Transactions under (i) are included in the balance of payments; allocations or cancellations are not entered in the balance of payments but are reflected in the international investment position.
- Reserve position in the Fund (paragraph 441):
  - A member’s reserve position in the Fund is a position recorded in the Fund’s General Resources Account under the category for reserve assets.
  - It is the sum of reserve tranche purchases that a member may draw upon and any indebtedness of the Fund (under a loan agreement) readily repayable to the member.
  - Reserve tranche purchases are purchases from the Fund of other currencies that do not cause Fund holdings of a member’s currency to exceed the member’s quota (minus holdings that reflect the member’s use of Fund credit).
  - A purchase from the Fund is recorded as an increase in foreign exchange holdings and a decrease in the member’s reserve position in the Fund; a repurchase is recorded as a decrease and an increase, respectively.
  - Purchases in the reserve tranche are not regarded as a use of Fund credit, are not subject to charges, and do not require repurchase.
  - Members may use Fund resources in connection with compensatory and contingency financing, buffer stock financing, the extended Fund facility, and the credit tranches (including policy on enlarged access) without having those purchases and holdings included in Fund holdings of member currencies for the purpose of defining the reserve tranche.
  - A member’s drawing (other than against its reserve tranche position) constitutes the use of Fund credit. (See paragraph 415.)
- Foreign exchange (paragraph 442):
  - Includes monetary authorities’ claims on nonresidents in the forms of ECUs, currency bank deposits, government securities, other bonds and notes, money market instruments, financial derivatives, equity securities, and nonmarketable claims arising from arrangements between central banks or governments.
  - Foreign exchange covers claims shown as the foreign exchange component of the series for international liquidity published by the Fund in International Financial Statistics.
  - Instrument subclassification of the foreign exchange component of reserve assets is necessary for compilation of global aggregates of the world financial account and for analyses of the global discrepancy in those aggregates.
- Other claims (paragraph 443):
  - Residual category covering claims not included previously that may constitute reserve assets in the form of currency, deposits, or securities (for example, working balances abroad of government nonmonetary agencies or assets held by banks and subject to control of monetary authorities).

### Valuation and interpretation
- Valuation (paragraph 444):
  - All transactions in reserve assets are recorded at market prices: market exchange rates at the times of transactions, market prices for claims such as securities, and SDR market rates as determined by the Fund.
  - Monetary gold transactions are valued at the market prices underlying the transactions.
  - For valuation of stocks of reserve assets in the international investment position, market prices in effect at the ends of appropriate periods are used.
- Interpretation of changes in reserve assets (paragraph 445):
  - Changes in reserve assets (within the context of broader aspects of external liquidity; see paragraph 425) are an important analytic tool for assessing balance of payments adjustment requirements but should not be viewed in isolation.
  - Difficulties can arise in correctly identifying certain items as reserve assets; similar problems pertain to identification of liabilities constituting foreign authorities’ reserves (LCFARs).
  - This chapter and Chapter 22 (covering LCFARs and exceptional financing transactions) are complementary.

### Structure, classification, and coverage
- Supplementary information need (paragraph 446):
  - Several important transactions are not separately identified in standard components of the financial account; supplementary information is necessary for analytical requirements, including derivation of overall measures of a balance of payments deficit or surplus.
  - Specific items include liabilities constituting foreign authorities’ reserves (LCFARs) and exceptional financing transactions (including debt reorganization related to balance of payments requirements).
  - Absence of separate identification reflects compilers’ views that inclusion would unduly expand standard components. (A presentation appears at the end of Chapter 8.)
- LCFARs (paragraphs 447–450):
  - In this fifth edition, LCFARs are not separately identified as components of the financial account.12
  - In the fourth edition, LCFARs were identified as separate components of each type of financial liability, except direct investment, in the capital account (in this Manual, the financial account).
  - Objective criteria to identify LCFARs and relationships to reserve assets remain elusive; it is often difficult for a debtor economy to link liabilities to assets identified as reserve assets by a creditor.
  - The potential utilization of reserve assets for varied purposes complicates matching liabilities to particular functions.
  - Compilers (debtors) are encouraged, when possible, to identify as LCFARs those liabilities treated as reserve assets by creditor economies to facilitate cross-checks of bilateral and international comparisons.
  - In the table on Selected Supplementary Information at the end of Chapter 8, LCFARs are classified primarily by instrument—debt securities, deposits, and other liabilities—and secondarily by sector.
  - In certain analytic presentations (see Appendix 5), including those of the Fund, LCFARs are grouped with reserve assets, use of Fund credit and loans from the Fund, and exceptional financing as below-the-line items (i.e., financing items above the line in the current account and the financial account).
  - Interpretation of LCFAR behavior depends on analysis purpose and factors causing the balance of payments changes; figures for LCFARs and reserve assets are not always satisfactory measures of means employed to finance a payments imbalance or of the size of that imbalance.
  - General considerations for identifying LCFARs:
    - A nonresident creditor will probably classify as reserve assets any liabilities of the compiling economy (i) repayable on demand or in the short run (i.e., marketable) or that the debtor is prepared to redeem on short notice; (ii) repayable in assets that the debtor would regard as reserve assets; and (iii) owed to a central bank or central government.

### Exceptional financing: concept and examples
- Concept (paragraphs 451–453):
  - Exceptional financing consists of other arrangements made by authorities (or by other sectors fostered by authorities) of an economy to meet balance of payments needs, as an alternative to—or in conjunction with—the use of reserve assets, Fund credit and loans from the Fund (both standard components), and LCFARs.
  - Use of IMF resources is subject to a conceptual requirement of need linked to a member’s balance of payments, reserve position, or developments concerning reserves.
  - Determination of need requires distinguishing:
    - (i) above-the-line transactions deemed autonomous or undertaken for the sake of the transactions and thus contributing to or resulting in an overall payments deficit or surplus, and
    - (ii) below-the-line items considered accommodating or financing the deficit or surplus.
  - Identification of exceptional financing transactions is linked to an analytic concept rather than precise criteria.
- Transactions commonly identified as exceptional financing (paragraph 453):
  - (i) Transfers—such as debt forgiveness, other intergovernmental grants, and grants received from Fund subsidy accounts.
  - (ii) Direct or other equity investment—such as debt or equity swaps involved with debt reduction.
  - (iii) Borrowing, including bond issues, by the government or central bank (for example, from foreign commercial banks).
  - (iv) Borrowing (including bond issues) implemented by other sectors of the economy and induced by authorities—usually with some form of exchange rate or interest subsidy.
  - (v) Other transactions related to debt reorganization—such as rescheduling of existing debt and accumulation and repayments of arrears.

### Balance of payments accounting for selected exceptional financing transactions
- General approach (paragraph 454):
  - Treatment of debt reorganization involves entries in several accounts in the standard presentation and entries to indicate below-the-line exceptional financing in analytic presentations (e.g., the aggregated one in the Fund’s Balance of Payments Statistics Yearbook).
  - In multi-year arrangements affecting future periods, no entries are made in accounts for the current period, although entries may be generated in future periods.
  - For analytical purposes, credit entries for appropriate exceptional financing transactions are construed as satisfying balance of payments needs or as below-the-line items, although associated debit entries may be made above the line.
  - Repayments made in advance of due dates by authorities and considered to be made for balance of payments reasons should be treated as below-the-line items; if made for other reasons, they are not classified as exceptional financing.
- Specific treatments:
  - Debt forgiveness (paragraph 455):
    - Treated as a capital transfer from the creditor to the debtor (see Chapter 17).
    - Offsets the reduction of the liability of the debtor in the financial account.
    - For the debtor: if obligations are past due, forgiveness involves arrears and both the receipt of the transfer and reduction in arrears are reflected under exceptional financing; if obligations are due in the current accounting period, only the transfer entry is shown under exceptional financing; if obligations are not yet due, there are no entries under exceptional financing.
  - Exceptional financing related to direct investment (paragraph 456):
    - Debt or equity swaps typically exchange bank claims or other debt instruments of debtor economies for nonresident investors’ equity investments, usually at a discount.
    - Often result in extinction of a fixed-payment liability denominated in foreign currency and creation of an equity liability (denominated in domestic currency) to a nonresident.
    - The difference between full value of the debt instrument and the value of the equity obtained should be construed as a valuation adjustment in the international investment position rather than as a transaction (e.g., a capital transfer).
  - Rescheduling or refinancing of existing debt (paragraph 457):
    - Involves replacing an existing contract with a new contract to extend debt service payments.
    - Interest and amortization obligations due in the current accounting period are considered paid on time and financed by the rescheduled loan: reduction of payments on the old loan and creation of a new loan.
    - Balance of payments entries include debit entries to interest income in the current account and, according to the maturity of the original loan, to short- or long-term loans in other investment; offsetting credit entry under long-term loans in that same category.
    - If rescheduling concerns obligations past due, arrears are involved (see paragraph 458); if obligations are not yet due, entries are made only under short- or long-term loans, as appropriate, in other investment.
    - If monetary authorities or general government assume debt of banks or other sectors under rescheduling, a credit is entered in the financial account for the assuming sector and a debit for the other sector.
  - Arrears of interest and amortization (paragraph 458):
    - Amounts past due and unpaid are recorded in accordance with the accrual principle as if paid, and a contra entry is made to reflect the new liability.
    - For interest arrears accruing in the reporting period: debit entry under income in the current account and corresponding credit entry under other investment-other liabilities-short-term in the financial account.
    - For amortization arrears: debit entry in the appropriate component of the financial account (e.g., short- or long-term loans under other investment) and a credit contra entry under other investment-other liabilities-short-term.
    - In analytical presentations, entries for arrears are made below the line (i.e., exceptional financing).
    - When rescheduled interest or interest in arrears includes interest accrued in a previous recording period, the accrual principle requires a debit entry under income in that previous period and an offsetting credit entry under the appropriate instrument in the financial account; subsequently, only interest accrued in the current period is debited under income, and interest accrued in the previous period is debited to the appropriate instrument in the financial account.
  - A detailed summary of required entries for various forms and aspects of exceptional financing transactions is presented in Appendix 4 (paragraph 459).

### Foreign sources of financing
- Compilation basis and recommended supplementary data (paragraph 460):
  - Financial flows in the balance of payments are generally compiled on a domestic transactor basis and in concordance with related statistical systems (e.g., the SNA and flows of funds accounts).
  - For analytical purposes—such as analyses of debtor economies’ sources of external borrowings by type of lender (official, bank, or other) and data comparisons for individual or groups of economies—identification of the nonresident party to a transaction is significant.
  - It is recommended that statistics on foreign sources of financing by sector (monetary authorities, general government, banks, and other) be collected as supplementary information. 

*Source: _bopman - CHAPTER XXI*

### CHAPTER XXII

### CHAPTER XXII

### Concept and Coverage
- The balance of payments transactions and international investment position constitute the set of international accounts for an economy (paragraph 461).
- The international investment position (IIP) is the balance sheet of the stock of external financial assets and liabilities and comprises:
  - claims on nonresidents,
  - liabilities to nonresidents,
  - monetary gold, and
  - SDRs (paragraph 461).
- By convention, land and other immovable tangibles (except those owned by extraterritorial units; see paragraph 64) are treated as the property of economic entities of the economies in which they are located; a nonresident owner is treated as having a financial claim on the resident entity rather than ownership of the nonfinancial asset itself (paragraph 461).
- The net international investment position (external financial assets minus external liabilities) combined with an economy’s stock of nonfinancial assets comprises the net worth of that economy (paragraph 462).
- The position at the end of a period reflects financial transactions, valuation changes, and other adjustments during the period; consistent classification across income, financial account, and position components is essential for reconciliation of stocks and flows (paragraph 463).

### Classification
- Classification of the IIP has two dimensions: rows (assets vs liabilities) and columns (factors accounting for changes during the period) (paragraph 464; paragraph 466).
- Functional subclassification (consistent with the financial account) divides both assets and liabilities into:
  - direct investment,
  - portfolio investment,
  - other investment,
  - reserve assets (reserve assets apply to assets only) (paragraph 464).
- Within functional categories:
  - Direct investment is subdivided into equity capital, reinvested earnings, and other capital (intercompany debt); claims on and liabilities to affiliated enterprises are shown separately (paragraph 465).
  - Portfolio investment is classified primarily by instrument—equity securities, debt securities, and financial derivatives—and secondarily by sector (paragraph 465).
  - Other investment is classified first by instrument (trade credits, loans, currency and deposits, other assets and liabilities such as capital subscriptions to international, nonmonetary organizations and miscellaneous accounts receivable/payable) and then by sector (paragraph 465).
  - Reserve assets are largely interchangeable from a functional standpoint (paragraph 465).
- Factors accounting for changes in the IIP columns include:
  - transactions (by component),
  - price changes,
  - exchange rate changes,
  - other adjustments (examples: allocation/cancellation of SDRs; gold monetization/demonetization; reclassifications such as from portfolio investment to direct investment when the 10 percent equity threshold is reached; unilateral cancellation of debt; expropriations or uncompensated seizures) (paragraph 466).

### Valuation of Components
- Principle: all external financial assets and liabilities should be measured at current market prices at the relevant dates (paragraph 467, footnote 13).
- Practical departures:
  - Direct investment often uses book values from enterprise balance sheets; if those are historical-cost based, they will not conform to the market-price principle (paragraph 467).
  - Countries that derive market-value estimates indirectly should also compile enterprise-provided balance-sheet (book value) data for comparability (paragraph 467).
- Portfolio investment valuation guidance:
  - Equity securities listed in organized markets or readily tradable: value based on actual prices (paragraph 468).
  - Equities not quoted or not regularly traded: estimate using prices of comparable quoted shares or net asset values if enterprise balance sheets on a current value basis are available (paragraph 468).
  - Debt securities listed or readily tradable: value based on current market prices; debt securities not readily tradable: estimate by net present value of expected future payments/receipts (paragraph 468).
- Financial derivatives:
  - Valuation principles are less definitive; the Manual provides brief valuation guidelines and does not attempt a thorough treatment due to ongoing innovations and evolving accounting standards (paragraph 469).
  - Traded options, warrants, traded financial futures: included at market values on accounting dates. Option value recorded as prevailing market rate or premium paid as proxy; counterpart liability valued at current buyout cost of option/warrant rights (paragraph 470).
  - Currency swap contracts recorded at market value; when payments are effected, asset and associated liability are amortized and reflected in the position on the appropriate accounting date (paragraph 470).
- Other investment (loans, deposits, miscellaneous accounts receivable/payable):
  - Not readily transferable instruments are recorded at nominal or face value, which generally is an acceptable proxy for market value (paragraph 471).
  - Loans to heavily-indebted countries have traded at significant discounts in secondary markets, raising valuation questions; secondary market quotations should be the basis for valuation of transactions (paragraph 471).
  - Asymmetry arises because creditors may value at secondary market prices while debtors record contractual principal repayable on maturity (paragraph 471).
  - Recommended treatment: creditors should, if feasible, provide supplementary data on nominal values of discounted loans; debtors should provide data on market values (paragraph 471).
- Effects of specific debt arrangements on the position:
  - Debt/equity swap: difference between nominal loan value and value of equity obtained treated as a valuation adjustment (paragraph 472(i)).
  - Forgiveness of a loan: capital transfer offsets reduction of debtor’s liability; transactions column reflects reduction in debtor’s liability and creditor’s asset (paragraph 472(ii)).
  - Rescheduling: new loan effectively replaces old loan; nominal value of new loan is basis of valuation (paragraph 472(iii)).
  - Unilateral cancellation by creditor: recorded under other adjustments (paragraph 472(iv)).
- Reserve assets valuation:
  - Monetary gold valued at prevailing market price,
  - SDRs valued at market rates calculated by the Fund,
  - Reserve position in the Fund valued on the basis of Fund calculation,
  - Foreign exchange assets and other claims valued at market prices prevailing at reference dates (paragraph 473).

### Relationship of the International Investment Position to External Debt
- The net IIP (external financial assets minus external liabilities) is used to analyze an economy’s position vis-à-vis the rest of the world; labels such as net creditor or net debtor (by algebraic sign) may be used but are not the preferred depiction (paragraph 474).
- Analytically, it is often more relevant to view only nonequity components of the position as debt (i.e., all recorded liabilities other than equity securities and direct investment equity capital, including reinvested earnings), consistent with the core definition of gross external debt in the joint 1988 study by IMF, World Bank, OECD, and BIS (paragraph 474; footnote 14).

### Investment Income, Rates of Return, and the International Investment Position
- Links between investment income in the balance of payments and the IIP (especially net investment income vs net position) are complex and require consistent classification of transactions and stocks (paragraph 475).
- Factors causing apparent anomalies between net investment income and net position include:
  - A positive net investment income with a negative net position can reflect a higher net rate of return on external assets than on liabilities (paragraph 476).
  - Possible causes of higher returns on assets: greater risk abroad; more mature outward direct investments with higher returns than less mature inward investments; relative magnitude and composition of position components (paragraph 476).
  - Sectoral composition examples: a large net positive banking-sector position where banks earn more on loans than they pay on deposits could offset a net negative equity position with low dividend yields relative to equity values (paragraph 476).
  - Use of historical cost balance sheet values for direct investment denominators can artificially raise calculated rates of return if those book values are substantially less than current market values (paragraph 476).
- Measurement and estimation issues:
  - Using stocks to derive income flows (applying interest rate and yield assumptions) can introduce errors; quality of dividend and interest flow estimates depends on stock estimates (paragraph 477).
  - Estimates based on outdated sources or surveys may be unreliable; direct reporting (e.g., direct investment surveys) generally yields fewer errors (paragraph 477).
  - Stocks and flows can serve as cross-checks; discrepancies indicate need for up-to-date surveys, improved transaction collection methods, or other avenues to improve estimates (paragraph 477).
- Analytical and policy implications:
  - The interrelationship between the IIP and cumulative balance of payments flows affects net lender/borrower status and has important implications for formulation and implementation of adjustment programs, the relative costs and financing requirements of these programs, and the role of the IMF (paragraph 477; see Appendix 5).

*CHAPTER XXII, _bopman - CHAPTER XXII*

### CHAPTER XXIII

### CHAPTER XXIII

### International Investment Position: Standard Components
- The chapter provides a detailed standard component structure for the international investment position, organized by Assets (A) and Liabilities (B) and showing changes in position reflecting: Position at Beginning of Year; Transactions; Exchange-Rate Changes; Price Changes; Other Adjustments; Position at End of Year.
- Assets (A) components listed include:
  - A.1. Direct investment abroad*
    - 1.1 Equity capital and reinvested earnings
      - 1.1.1 Claims on affiliated enterprises
      - 1.1.2 Liabilities to affiliated enterprises
    - A.1.1.2 Other capital
    - 1.2.1 Claims on affiliated enterprises
    - 1.2.2 Liabilities to affiliated enterprises
    - A.1.2.2 Debt securities (including subitems for bonds and notes; money market instruments; financial derivatives and sectoral breakdowns)
  - A.2. Portfolio investment
    - 2.1 Equity securities (2.1.1 Monetary authorities; 2.1.2 General government; 2.1.3 Banks; 2.1.4 Other sectors)
    - 2.2 Debt securities (2.2.1 Bonds and notes with sectoral breakdowns; 2.2.2 Money market instruments with sectoral breakdowns; 2.2.3 Financial derivatives with sectoral breakdowns)
  - A.3. Other investment (trade credits, loans with long-term/short-term and sectoral breakdowns, currency and deposits, other assets with long-term/short-term and sectoral breakdowns)
  - A.4. Reserve assets (4.1 Monetary gold; 4.2 Special drawing rights; 4.3 Reserve position in the Fund; 4.4 Foreign exchange with 4.4.1 Currency and deposits and 4.4.2 Securities subitems, including 4.4.2.1 Equities; 4.4.2.2 Bonds and notes; 4.4.2.3 Money market instruments and financial derivatives)
- Liabilities (B) components mirror assets for direct investment in the reporting economy, portfolio investment, and other investment with analogous sectoral and instrument breakdowns.
- Note: "*Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and in the reporting economy under the heading Liabilities—claim/liability breakdowns are shown for the components of each, although these sub-items do not strictly conform to the overall headings of Assets and Liabilities.*"

### Regional Allocation — Overview
- Part three of the Manual discusses conceptual and practical issues concerning regional allocation of transactions and stocks of external assets and liabilities.
- Regional or bilateral statements can be compiled analogous to global balance of payments and international investment position statements, substituting specific references to residents of the relevant foreign economy or group of economies for general references to nonresidents or the rest of the world.
- Regional compilations have increased importance due to developments such as:
  - the emergence of large payments imbalances between and among certain individual economies and groups of economies;
  - the transition towards economic and monetary integration (particularly in the European Community and other areas).
- Harmonization of concepts, methodology, and data collection for global and regional statements will mutually reinforce and improve quality.

### Regional Allocation Principles
- Allocation rules for goods, services, income, and transfers:
  - Trade in goods: exports allocated to the region of residence of the new owner and imports allocated to the region of residence of the former owner; when there is no change in ownership (e.g., processing and financial leases), exports and imports are treated as if such a change occurs.
  - Services: allocation to the region where the provider or acquirer of the service is resident.
  - Income: allocation to the region where the resident receives or pays the income.
  - Transfers: allocation to the region of the donor or recipient, as appropriate.
- Two principles for regional allocation of financial flows:
  - Debtor/creditor principle: allocate changes in financial claims to the country of residence of the nonresident debtor; allocate changes in liabilities to the country of residence of the nonresident creditor.
  - Transactor principle: allocate changes in claims and liabilities to the country of residence of the nonresident party to the transaction (the transactor).
- For the international investment position (stocks), geographic allocation is on the basis of the debtor/creditor principle: financial claims allocated to the country of residence of the nonresident debtor; liabilities allocated to the country of residence of the nonresident creditor.

### Problems and Limitations
- Securities transactions:
  - In broad secondary markets with financial intermediaries, the debtor/creditor principle may be ineffective because issuers (debtors) often do not know the identities or residences of nonresident buyers (creditors).
  - For foreign securities, the debtor/creditor principle is effective on both sides because the buyer or seller knows the identity and residence of the issuer (debtor).
  - Under the transactor principle, allocations can differ markedly from the debtor/creditor principle, and in practice it is often difficult to determine whether intermediaries act for their own accounts or on behalf of other residents; consequently, transactions are often attributed to the intermediary’s country of residence.
- Monetary gold and SDRs:
  - Cannot be allocated regionally on the debtor/creditor principle because they are financial assets with no outstanding liabilities; they can only be attributed to an unallocated or residual regional category.
  - On the transactor principle, purchases or sales of monetary gold are recorded as increases or decreases in reserve assets; SDRs are recorded similarly to monetary gold.
- Direct investment transactions involving third parties:
  - Example: direct investor in country A acquires an enterprise in country B from a resident of country C. Debtor/creditor principle implies recording between A and B; transactor principle implies recording between A and C; a reconciliation item may be required to bridge differences between balance of payments entries and the position.
- Multilateral settlements:
  - Regional allocation may not produce a balanced statement for a region; multilateral settlements items can restore accounting balance as offsets to inconsistencies.
  - Data on multilateral settlements are seldom available; the item is usually derived as a residual and can be calculated only in combination with net errors and omissions.

### Analytical Implications
- International investment position stocks are allocated on the debtor/creditor basis; therefore, using the debtor/creditor principle for transactions supports conceptual consistency between flows and stocks, though implementation can be difficult.
- Both principles have analytical value:
  - Debtor/creditor basis facilitates analysis of whose securities are being purchased and sold, the importance of securities transactions attributable to individual countries and regional groups, and types of offerings.
  - Transactor basis facilitates analysis of where residents engage in securities transactions with nonresidents, and growth of international financial centers.
- Data exchange of position data on stocks between countries is helpful to improve regional allocations and identify nonresident creditors.

### Selection of Regions
- Regional classification is by residence of the foreign economic entity (owner/transactor or creditor/debtor) using the residence rules in Chapter 4; a region comprises an economic territory or a group of economic territories.
- Special cases:
  - International organizations not considered resident in the economy of location may be treated as a separate region for allocation purposes.
- The Manual does not prescribe a standard list of countries or regions for compilation; the relevant regional subclassification depends on how the statement will be utilized.

*CHAPTER XXIII — _bopman - CHAPTER XXIII_*

### Introduction

### Introduction

### Relationship of the Rest of the World Account to the Balance of Payments Accounts and the IIP
- Balance of payments accounts and the international investment position (IIP) are closely linked to the SNA; in most countries BOP and IIP data are compiled first and then incorporated into the SNA rest of the world account (paragraph 499).
- There is virtually complete concordance between the SNA and the Manual on:
  - delineation of resident units;
  - valuation of transactions and stocks of external assets and liabilities;
  - time of recording of transactions;
  - conversion procedures;
  - coverage of international transactions in goods and services, income flows, current transfers, capital transfers, and foreign financial assets and liabilities;
  - coverage of the IIP (paragraph 499).
- Differences in classification or level of detail reflect:
  - differences in analytical requirements;
  - the need for a uniform classification scheme in the SNA for all sectors;
  - internal structural constraints of each system (paragraph 499).
- The appendix focuses on relationships between aggregates and details in the rest of the world account and corresponding BOP and IIP items (paragraph 499).

### Resident units
- Resident producers and consumers are identified identically in the SNA and the Manual (paragraph 500).
- Chapter 4 of the Manual is consistent with Chapter XIV of the SNA; residence is based on the center of economic interest concept and the definition of economic territory (paragraph 500).

### Valuation
- Market price is the primary basis of valuation in both the SNA and the BOP (paragraph 501).
- For transactions accounts, market price refers to the actual price agreed by transactors (paragraph 501).
- Market price proxies or equivalents should be used when literal market prices cannot be determined (examples: transfer pricing distortions between affiliates, barter transactions, grants in kind) (paragraph 501).
- Use of end-of-period market (current) prices or proxies is advocated for balance sheet accounts affecting external claims and liabilities (paragraph 501).

### Time of Recording
- Both systems use accrual accounting: record when economic value is created, transformed, exchanged, transferred, or extinguished (paragraph 502).
- Claims and liabilities arise when there are changes in ownership; application of accrual basis is essentially identical across systems (paragraph 502).
- Specific recording rules (paragraph 502):
  - Exports and imports of goods: recorded on change of ownership basis, subject to exceptions (financial lease, goods shipped between affiliates, goods for processing, merchanting).
  - Services: recorded when actually rendered (often coincides with production).
  - Interest: recorded on an accrual basis.
  - Dividends: recorded as of dates payable.
  - Reinvested earnings on direct investment: recorded in periods in which earnings are generated.
  - Transfers (taxes, fines): recorded as of dates of occurrence; other transfers recorded when the offsetting resources change ownership.
  - Financial claims and liabilities: recorded on changes of ownership when creditor and debtor enter claim and liability on their books.
- Chapter 6 contains a full discussion of accrual application (paragraph 502).

### Conversion Procedures
- Consistent procedures for converting transactions in various currencies into the compiling unit of account (usually national currency) are employed (paragraph 503).
- Under a single exchange rate system: use the market exchange rate prevailing at the time of the transaction; defined as midpoint between buying and selling rates or alternatively as the average rate for the shortest applicable period (paragraph 503).
- When parallel markets exist: use the midpoint spot rate applying to foreign currencies purchased or sold in parallel markets (paragraph 503).
- Multiple official exchange rates give rise to implicit taxes and subsidies (paragraph 504):
  - SNA recommends converting transactions at the actual (multiple) rates applicable.
  - Global adjustments reflecting taxes or subsidies should be shown in the rest of the world account with counterpart entries under capital transfers.
  - Taxes and subsidies are calculated as the difference between (i) values at actual multiple rates applicable to specific transactions and (ii) values at a unitary rate calculated as a weighted average of all official rates used.
  - When multiple rates exist, the Manual suggests using a unitary or principal rate (the actual multiple exchange rate that applies to the largest part of external transactions) (paragraph 504).
- For conversion of balance sheet items (stocks of external financial assets and liabilities): use actual market exchange rates applicable to specific assets and liabilities on the date to which the balance sheet relates (paragraph 505).

### Classification and Linkages
- Harmonization of major aggregate coverage attained, but differences in level of detail exist due to analytical needs, quantitative significance, and system constraints; bridges can be constructed to derive national accounting flows and stocks from BOP and IIP (paragraph 506).
- SNA rest of the world account transaction breakdown:
  - V.I External account of goods and services
  - V.II External account of primary incomes and current transfers
  - V.III.1 Capital account
  - V.III.2 Financial account
  - V.III.3.1 Other changes in volume of assets
  - V.III.3.2 Revaluation account
  - V.IV External assets and liabilities (equivalent to IIP) (paragraph 507).
- Correspondence with balance of payments:
  - Accounts V.I and V.II correspond to the current account.
  - V.III.1 corresponds to the capital account of the capital and financial account.
  - V.III.2 corresponds to the financial account of the capital and financial account.
  - V.III.3.1 corresponds to other adjustments column in the IIP.
  - V.III.3.2 corresponds to valuation changes (price changes and exchange rate changes) columns in the IIP.
  - V.IV is equivalent to the IIP (paragraph 507).
- Tables 1–6 provide reconciliation between SNA external accounts and corresponding BOP and IIP items; Tables 7–9 show the classification scheme underlying the Manual and BOP/IIP. Items marked with asterisks (*) denote additional details necessary to derive national accounting flows from BOP and IIP data (paragraph 507).

### Coverage and Specific Items
- SNA coverage of exports and imports of goods and services is identical to BOP coverage except for “financial intermediation charge indirectly measured,” which the Manual includes under investment income as an indistinguishable part of interest income (paragraph 508).
- BOP disaggregates exports and imports of services in considerable detail to support analysis and policy (including negotiations under the General Agreement on Tariffs and Trade); service categories are consistent with the Central Product Classification (CPC) except for travel and government services n.i.e., which have no counterparts (paragraph 508).
- For account V.II (external account of primary incomes and current transfers), comparable BOP categories are 1. B. Income and 1. C. Current transfers (paragraph 509).
  - Coverage of compensation of employees and property income is virtually identical, except BOP includes “financial intermediation charge indirectly measured” under investment income—direct investment—interest, due to practical difficulties in estimating imputed financial intermediary service charges by sector, instrument, currency, and term structure (paragraph 509).
- Account V.III.1 (SNA capital account) is identical with the BOP capital account; the balancing item net lending/net borrowing in V.III.1 is not explicitly identified in the BOP but can be derived by adding the current account balance and the capital account transactions (paragraph 510).
- Account V.III.2 (SNA financial account) is identical in coverage with the BOP financial account though at a different level of detail (paragraph 511):
  - In the SNA, financial assets are classified primarily by type of instrument.
  - In the BOP, financial items are classified primarily by function—direct investment, portfolio investment, other investment (including loans), and reserve assets.
  - The BOP contains an abbreviated sector breakdown (monetary authorities, general government, banks, and other sectors) to link with money and banking, government finance, international banking, and external debt statistics.
  - The Manual states entries in the BOP financial account are recorded in principle on a net basis (increases less decreases); gross recording is included as supplementary information (for example, drawings and repayments on long-term loans) (paragraph 511).

*Source: _bopman - Introduction*

### APPENDIX I

### APPENDIX I

### Reconciliation of Rest of the World Accounts with Balance of Payments Accounts — Account V.I External Account of Goods and Services
- USES / CREDIT
  - P.6 Exports of goods and services — Item 1.A.a and 1.A.b.1 through 11, as noted subsequently
  - P.61 Exports of goods — Item 1.A.a goods
  - P.62 Exports of services — Sum of items 1.A.b.1 through 11 services plus items 1.B.2.2.2.1.1 and 1.B.2.3.1 financial intermediation charge indirectly measured
- RESOURCES / DEBIT
  - P.7 Imports of goods and services — Items 1.A.a and 1.A.b.1 through 11, as noted subsequently
  - P.71 Imports of goods — Item 1.A.a goods
  - P.72 Imports of services — Sum of items 1.a.b.1 through 11 services plus items 1.B.2.2.2.1.1 and 1.B.2.3.1 financial intermediation charge indirectly measured
- B.11 EXTERNAL BALANCE OF GOODS AND SERVICES — Item 1.A

### Account V.II External Account of Primary Incomes and Current Transfers
- USES / CREDIT
  - D.1 Compensation of employees — Item 1.B.1 compensation of employees
  - D.29 Other taxes on production — Item 1.C.1.2 other taxes on production
  - D.39 Other subsidies on production — Item 1.C.1.3 other subsidies on production
  - D.4 Property income — Item 1.B.2 investment income minus items 1.B.2.2.2.1.1 and 1.B.2.3.1 financial intermediation charge indirectly measured
  - D.5 Current taxes on income, wealth, etc. — Item 1.C.1.1 current taxes on income, wealth, etc.
  - D.61 Social contributions — Item 1.C.1.4 social contributions
  - D.62 Social benefits — Item 1.C.2.2.5 social benefits
  - D.7 Other current transfers — Item 1.C.2.1 workers’ remittances plus item 1.C.1.6 other current transfers of general government plus item 1.C.2.2.6 other current transfers of other sectors
  - D.8 Adjustment for the change in net equity of households in pension funds* — (note: Item D.8 is not included in the current account in the balance of payments, nor are the receipts of pensions from, or net contributions to, (funded) pension funds.)
- RESOURCES / DEBIT
  - D.1 Compensation of employees — Item 1.B.1 compensation of employees
  - D.29 Other taxes on production — Item 1.C.2.2.2 other taxes on production
  - D.39 Other subsidies on production — Item 1.C.2.2.3 other subsidies on production
  - D.4 Property income — Item 1.B.2 investment income minus items 1.B.2.2.2.1.1 and 1.B.2.3.1 financial intermediation charge indirectly measured
  - D.5 Current taxes on income, wealth, etc. — Item 1.C.2.2.1 current taxes on income, wealth etc.
  - D.61 Social contributions — Item 1.C.2.2.4 social contributions
  - D.62 Social benefits — Item 1.C.1.5 social benefits
  - D.7 Other current transfers — Item 1.C.2.1 workers’ remittances plus item 1.C.1.6 other current transfers of general government plus item 1.C.2.2.6 other current transfers of other sectors
- B.12 CURRENT EXTERNAL BALANCE — Item 1. current account

### Account V.III.1 Capital Account [of Account V.III External Accumulation Accounts]
- CHANGES IN ASSETS / TRANSACTIONS IN ASSETS
  - K.2 Acquisitions less disposals of nonproduced, nonfinancial assets — Item 2.A.2 acquisition/disposal of nonproduced, nonfinancial assets
- B.9 NET LENDING (+)/NET BORROWING (–) — Item 1. current account balance plus item 2. A capital account balance
- CHANGES IN LIABILITIES AND NET WORTH / TRANSACTIONS IN LIABILITIES
  - B.12 CURRENT EXTERNAL BALANCE — Item 1. current account
  - D.9 Capital transfers receivable — Item 2.A.1 capital transfers
  - D.9 Capital transfers payable — Item 2.A.1 capital transfers
  - B.10.1 CHANGES IN NET WORTH DUE TO SAVING AND NET CAPITAL TRANSFERS — Item 1. current account balance plus item 2.A.1 net capital transfers

### Account V.III.2 Financial Account [of Account V.III External Accumulation Accounts]
- CHANGES IN ASSETS / TRANSACTIONS IN ASSETS
  - F.1 Monetary gold and SDRs — Sum of items 2.B.4.1 monetary gold and 2.B.4.2 special drawing rights
  - F.2 Currency and deposits — Sum of items 2.B.3.1.3 currency and deposits (part of other investment) and 2.B.4.3.1 deposits (part of reserve position in the Fund), 2.B.4.4.1 currency and deposits (part of foreign exchange), and 2.B.4.5.1 currency and deposits (part of other reserve claims)
  - F.3 Securities other than shares — Sum of items 2.B.2.1.2 debt securities (part of portfolio investment), 2.B.4.4.2.2 bonds and notes (part of foreign exchange), 2.B.4.4.2.3 money market instruments and financial derivatives (part of foreign exchange), 2.B.4.5.2.2 debt securities (part of other reserve claims), 2.B.1.2.3.1.1 debt securities issued by direct investors (part of direct investment in the reporting economy), and 2.B.1.1.3.1.1 debt securities issued by affiliated enterprises (part of direct investment abroad)
  - F.4 Loans — Sum of items 2.B.3.1.2 loans (part of other investment) and 2.B.4.3.2 loans (part of reserve position in the Fund)
  - F.5 Shares and other equity — Sum of items 2.B.1.1.1.1 equity capital-claims on affiliated enterprises (part of direct investment abroad), 2.B.1.1.2 reinvested earnings (part of direct investment abroad), 2.B.1.2.1.1 equity capital-claims on direct investors (part of direct investment in the reporting economy), 2.B.2.1.1 equity securities (part of portfolio investment), and 2.B.4.4.2.1 and 2.B.4.5.2.1 equities (part of foreign exchange and other reserve claims)
  - F.6 Insurance technical reserves — Sum of items 2.B.3.1.4.4.1.1 net equity of households in life insurance reserves and in pension funds and 2.B.3.1.4.1.1.1, 2.B.3.1.4.2.1.1, 2.B.3.1.4.3.1.1, and 2.B.3.1.4.4.1.2 prepayments of premiums and reserves against outstanding claims (all part of other investment)
  - F.7 Other accounts receivable — Sum of items 2.B.1.1.3.1.2 other claims on affiliated enterprises (part of direct investment abroad), 2.B.1.2.3.1.2 other claims on direct investors (part of direct investment in the reporting economy), 2.B.3.1.1 trade credits (part of other investment), and 2.B.3.1.4 other assets minus items 2.B.3.1.4.4.1.1 net equity of households in life insurance reserves and in pension funds, and 2.B.3.1.4.1.1.1, 2.B.3.1.4.2.1.1, 2.B.3.1.4.3.1.1, and 2.B.3.1.4.4.1.2 prepayments of premiums and reserves against outstanding claims (all part of other investment)
- CHANGES IN LIABILITIES AND NET WORTH / TRANSACTIONS IN LIABILITIES
  - F.2 Currency and deposits — Item 2.B.3.2.3 currency and deposits
  - F.3 Securities other than shares — Item 2.B.1.1.3.2.1 debt securities issued by direct investors plus item 2.B.1.2.3.2.1 debt securities issued by affiliated enterprises plus item 2.B.2.2.2 debt securities (part of portfolio investment)
  - F.4 Loans — Item 2.B.3.2.2 loans
  - F.5 Shares and other equity — Sum of items 2.B.1.1.1.2 equity capital-liabilities to affiliated enterprises (part of direct investment abroad), item 2.B.1.2.1.2 equity capital-liabilities to direct investors (part of direct investment in the reporting economy), item 2.B.1.2.2 reinvested earnings (part of direct investment in the reporting economy), and item 2.B.2.2.1 equity securities (part of portfolio investment)
  - F.6 Insurance technical reserves — Sum of items 2.B.3.2.4.4.1.1 net equity of households in life insurance reserves and in pension funds and 2.B.3.2.4.4.1.2 prepayments of premiums and reserves against outstanding claims
  - F.7 Other accounts payable — Sum of items 2.B.1.1.3.2.2 other liabilities of direct investors (part of direct investment abroad), 2.B.1.2.3.2.2 other liabilities to direct investors (part of direct investment in the reporting economy), item 2.B.3.2.1 trade credits (part of other investment), and item 2.B.3.2.4 other liabilities minus items 2.B.3.2.4.4.1.1 net equity of households in life insurance reserves and in pension funds, and 2.B.3.2.4.4.1.2 prepayments of premiums and reserves against outstanding claims (all part of other investment)
- B.9 NET LENDING (+)/NET BORROWING (–)

### Account V.III.3.1 Other Changes in Volume of Assets Account
- CHANGES IN ASSETS / CHANGES IN ASSETS
  - K.7 Catastrophic losses — Catastrophic losses (part of other adjustments)
  - K.8 Uncompensated seizures — Uncompensated seizures (part of other adjustments)
  - K.10 Other volume changes in financial assets and liabilities n.e.c. — Other volume changes (part of other adjustments)
  - K.12 Changes in classifications and structure — Change in classifications and structure (part of other adjustments)
- CHANGES IN LIABILITIES AND NET WORTH / CHANGES IN LIABILITIES
  - K.7 Catastrophic losses — Catastrophic losses (part of other adjustments)
  - K.12 Changes in classifications and structure — Changes in classifications and structure (part of other adjustments)
- B.10.2 CHANGES IN NET WORTH DUE TO OTHER CHANGES IN VOLUME OF ASSETS

### Account V.III.3.2 Revaluation Account
- CHANGES IN ASSETS / CHANGES IN ASSETS
  - K.11 Nominal holding gains/losses in financial assets — Sum of entries in the columns for price and exchange rate changes
  - K.11.1 Neutral holding gains/losses in financial assets — Sum of entries in the columns for neutral holding gains/losses
  - K.11.2 Real holding gains/losses in financial assets — Sum of entries in the columns for real holding gains/losses
- CHANGES IN LIABILITIES AND NET WORTH / CHANGES IN LIABILITIES
  - K.11 Nominal holding gains/losses in liabilities — Sum of entries in the columns for price and exchange rate changes
  - K.11.1 Neutral holding gains/losses in liabilties — Sum of entries in the columns for neutral holding gains/losses in liabilities
  - K.11.2 Real holding gains/losses in liabilities — Sum of entries in the columns for real holding gains/ losses in liabilities
- B.10.3 CHANGES IN NET WORTH DUE TO NOMINAL HOLDING GAINS/LOSSES — Price and exchange rate changes in assets less price and exchange rate changes in liabilities
- B.10.31 CHANGES IN NET WORTH DUE TO NEUTRAL HOLDING GAINS/LOSSES — Neutral holding gains/losses in assets less neutral holding gains/losses in liabilities
- B.10.32 CHANGES IN NET WORTH DUE TO REAL HOLDING GAINS/LOSSES — Real holding gains/losses in assets less real holding gains/losses in liabilities

### Account V.IV External Assets and Liabilities
- Account V.IV.1 Opening Balance Sheet
  - ASSETS — Sum of items A.1.1.1 claims (equity capital and reinvested earnings) on affiliated enterprises (part of direct investment abroad), A.1.2.1 claims (other capital) on affiliated enterprises (part of direct investment abroad), B.1.1.1 claims (equity capital and reinvested earnings) on direct investors (part of direct investment in the reporting economy), B.1.2.1 claims (other capital) on direct investors (part of direct investment in the reporting economy), A.2 portfolio investment, A.3 other investment, and A.4 reserve assets
  - LIABILITIES — Sum of items B.1.1.2 liabilities (equity capital and reinvested earnings) to direct investors (part of direct investment in the reporting economy), B.1.2.2 liabilities (other capital) to direct investors (part of direct investment in the reporting economy), A.1.1.2 liabilities (equity capital and reinvested earnings) to affiliated enterprises (part of direct investment abroad), A.1.2.2 liabilities (other capital) to affiliated enterprises (part of direct investment abroad), B.2 portfolio investment, and B.3 other investment
  - B.90 NET WORTH
- Account V.IV.2 Changes Between Balance Sheets
  - AFTotal changes in financial assets — Sum of transactions, price and exchange rate changes, and other adjustments in respect of the corresponding IIP items identified in account V.IV.1 of the SNA
  - AFTotal changes in liabilities — Sum of transactions, price and exchange rate changes, and other adjustments in respect of corresponding IIP items identified in account V.IV.1 of the SNA
- Account V.IV.3 Closing Balance Sheet
  - ASSETS — Sum of end-of-period values of corresponding items contained in the IIP and identified in account V.IV.1 of the SNA
  - LIABILITIES — Sum of end-of-period values of corresponding items contained in the IIP and identified in account V.I.V.1 of the SNA
  - B.10 CHANGES IN NET WORTH, TOTAL — Total changes in item A (assets) minus total changes in item B (liabilities)

### Balance of Payments: Standard Components and Additional Detail (Selected entries)
- 1. Current account
  - 1.A. Goods and services
    - a. Goods
      - 1. General merchandise
      - 2. Goods for processing
      - 3. Repairs on goods
      - 4. Goods procured in ports by carriers
      - 5. Nonmonetary gold
        - 5.1 Held as a store of value
        - 5.2 Other
    - 1.A.b. Services (items 1 through 11 enumerated in the source, including transportation, travel, communications services, construction services, insurance services, financial services, computer and information services, royalties and license fees, other business services, personal, cultural, and recreational services, government services n.i.e.)
  - 1.B. Income
    - 1.B.1 Compensation of employees
    - 2. Investment income (including Direct investment, Portfolio investment, Other investment, Financial intermediation charge indirectly measured*, Imputed income to households from net equity in life insurance reserves and in pension funds*)
  - 1.C. Current transfers
    - C.1.1 General government (1.1 Current taxes on income, wealth etc.*; 1.2 Other taxes on production*; 1.3 Other subsidies on production*; 1.4 Social contributions*; 1.5 Social benefits*; 1.6 Other current transfers of general government*)
    - C.1.2 Other sectors

*Item D.8 is not included in the current account in the balance of payments, nor are the receipts of pensions from, or net contributions to, (funded) pension funds.*

*Source: APPENDIX I*

### 2.1 Workers’ remittances

### 2.1 Workers’ remittances

### Location and context in the Manual
- Appears as a standard component heading in Table 7: "Balance of Payments: Standard Components and Additional Detail" (page 133).
- Placed immediately before "2.2 Other transfers" and the sequence of other current transfer subitems listed in the Manual:
  - 2.2 Other transfers
  - 2.2.1 Current taxes on income, wealth, etc.*XXX
  - 2.2.2 Other taxes on production*XXX
  - 2.2.3 Other subsidies on production*XXX
  - 2.2.4 Social contributions*XXX
  - 2.2.5 Social benefits*XXX
  - 2.2.6 Other current transfers of other sectors*

### Structural role within balance of payments classification
- Identified as a component of current transfers in the Balance of Payments classification (as shown in Table 7).
- Table 7 is part of the Manual’s comprehensive list of balance of payments components and additional detail used for compilation and reconciliation with the SNA Rest of the World Account.
- Items marked with an asterisk ("*") in Table 7 denote "Details necessary for reconciliation with classifications used in the SNA Rest of the World Account."

### Relationship to adjoining framework elements
- Table 7 situates workers’ remittances within the broader presentation that also includes:
  - Capital and Financial Account headings (C.A. Capital account; C.B. Financial account) and their subcomponents (Direct investment, Portfolio investment, Other investment, Reserve assets).
  - Supplementary information tables (Table 8) and International Investment Position details (Table 9).
- The Manual emphasizes sectorization (monetary authorities, general government, banks, other sectors) and a hierarchical, decimal coding approach for classifications elsewhere in the chapter—context relevant to consistent recording and sector breakdowns that apply across balance of payments components, including workers’ remittances.

*Source: _bopman - 2.1 Workers’ remittances*

### APPENDIX III

### _bopman - APPENDIX III

### IV. Accounting for Exceptional Financing Transactions — overview
- Paragraphs covered: 526–549.
- Context: Distinction between analytic and standard presentations in the Balance of Payments (BOP) and treatment of exceptional financing transactions (including arrears, repayments, debt forgiveness, grants, debt/bond swaps, debt/equity swaps, borrowing for BOP support, rescheduling/refinancing, and new money facilities).
- Key presentation principle: In an analytic presentation (as in the IMF’s aggregated presentation in the Balance of Payments Statistics Yearbook (BOPSY)), exceptional financing transactions that accommodate balance of payments needs are shown below the line; corresponding credit and debit entries may be shown above or below the line depending on the nature and timing of the transaction. For creditor countries, entries should be fully symmetrical, but creditor countries should have no below-the-line entries under exceptional financing (paragraph 527).

### Accumulation of arrears (paragraphs 528–529)
- Standard presentation recording rules:
  - Arrears of interest and amortization are recorded as if amounts had been paid on schedule; an offsetting entry reflects the associated new short-term liability (paragraph 528).
  - For arrears of interest accrued in the current recording period:
    - Debit: investment income (current account).
    - Credit: other investment-other liabilities (short-term) in the financial account.
  - For arrears of interest accrued in a previous recording period:
    - Accrual principle requires a debit under investment income in the period interest was accrued and an offsetting credit in the financial account under the appropriate instrument.
    - When arrears are incurred on previously accrued interest: debit under the appropriate instrument in the financial account and a credit contra entry under other investment-other liabilities (short-term) for the accrual of arrears.
  - For amortization arrears:
    - Debit in the appropriate component of the financial account (for example, short- or long-term loans under other investment).
    - Credit contra entry under other investment-other liabilities (short-term) for the accrual of arrears.
- Analytic presentation rule:
  - Only payments arrears resulting from balance of payments difficulties (inability of authorities to provide foreign exchange) are included under exceptional financing.
  - Such arrears are recorded below the line as credit entries under exceptional financing; offsetting debit entries are recorded above the line under the appropriate account (paragraph 529).

### Repayment of arrears (paragraphs 530–531)
- Standard presentation:
  - Repayment of arrears (cash settlements of interest and amortization) is recorded as:
    - Debit: other investment-other liabilities (short-term).
    - Credit: reserve assets (paragraph 530).
- Analytic presentation:
  - Repayments of arrears arising from balance of payments needs are recorded below the line as debit entries under exceptional financing (for the reduction of liabilities).
  - Corresponding credit contra entries are recorded under reserve assets (paragraph 531).

### Debt forgiveness (paragraphs 532–534)
- Standard presentation:
  - Debtor records debt forgiveness as:
    - Credit: capital transfers.
    - Debit: reduction of the liability in the financial account (appropriate instrument depending on timing).
  - Specifics by timing:
    - Forgiveness of obligations past due (arrears of interest and amortization): debit under other investment-other liabilities (short-term).
    - Forgiveness of obligations due in the current recording period: debit under the appropriate debt instrument in the financial account for reduction of principal and any interest accrued in the previous period; interest accruing in the current period recorded as a debit under investment income in the current account.
    - Forgiveness of an obligation not yet due: debit under the appropriate debt instrument in the financial account; no entry for interest not yet due (paragraph 532).
- Analytic presentation:
  - Debt forgiveness for obligations falling due in the current recording period and in arrears: recorded below the line as a credit entry under exceptional financing; corresponding debit entries recorded above the line—except when arrears are forgiven, in which case the debit entry is recorded below the line (paragraph 533).
- Valuation of debts forgiven:
  - Recommended basis: market prices for flows and stocks.
  - For nonmarketable official debt, nominal or face value is an acceptable proxy for market value (paragraph 534).

### Other intergovernmental grants (paragraph 535)
- Grants provided to satisfy balance of payments needs (including grants from Fund subsidy accounts) are part of exceptional financing.
- Analytic presentation:
  - Recorded below the line as credit entries under exceptional financing.
  - Corresponding debit entry recorded under reserve assets (paragraph 535).

### Debt/bond swaps (paragraphs 536–538)
- Standard presentation:
  - Debtor records a debt/bond swap as:
    - Credit: portfolio investment (showing creation of the new obligation).
    - Debit: appropriate debt instrument for reduction in liabilities (paragraph 536).
- Analytic presentation:
  - Swaps of obligations falling due in the reporting period and in arrears: recorded below the line as credit entries under exceptional financing; corresponding debits above the line.
  - If arrears are canceled as a result of the swap, debit entries are recorded below the line (paragraph 537).
  - For obligations not yet due, entries are recorded above the line (paragraph 537).
- Valuation guidance:
  - Record swaps at market prices.
  - Possible proxies for market price include:
    - Market price of a traded similar bond.
    - Acquisition price if the debt was recently acquired by the creditor.
    - Discounted value of the bond if coupon interest rate is below prevailing rate.
    - If no information, face value of the bond being issued may be used as a proxy.
  - The difference between face value of the old debt and market price of the new bond represents a realized holding (capital) loss for the creditor (paragraph 538).

### Debt/equity swaps (paragraphs 539–543; footnote 18)
- Nature:
  - Exchange, usually at a discount, of bank claims or other debt instruments for nonresident investors’ equity investments in the debtor economy (paragraph 539).
- Recording modalities:
  - Direct exchange of debt for equity:
    - Similar to debt/bond swaps, but credit entries should be made under direct investment-equity capital.
    - Transactions should be recorded at prices at which equity investors acquired the claims in the secondary market (paragraph 540).
  - Two-step modality:
    - First, fixed-payment liability exchanged at a discount for a financial instrument or domestic deposit; recorded by debtor as an increase in liabilities (credit) under the financial instrument exchanged; corresponding debit entries depend on classification of redeemed obligation.
    - Second, nonresident investor exchanges the financial instrument for equity; then credit recorded under direct investment-equity capital and debit under the financial instrument exchanged (paragraph 541).
- Analytic presentation:
  - Only initial transaction associated with a debt/equity swap is relevant for exceptional financing.
  - Swaps of obligations falling due in the reporting period and in arrears: recorded below the line as credit entries under exceptional financing; corresponding debits above the line; debit recorded below the line if arrears are canceled (paragraph 542).
  - For obligations not yet due: no below-the-line exceptional financing entries (paragraph 542).
- Valuation:
  - Debt/equity swaps are valued at market prices.
  - If BOP compiled in foreign currency:
    - Value of first transaction = market value in foreign currency of exchange of debt instrument for other financial instrument (price at which claim was acquired by nonresident equity investor).
    - Value of second transaction = price paid (in domestic currency converted at market exchange rate) for equity acquired by the nonresident investor.
  - If BOP compiled in domestic currency:
    - Value of first transaction = amount received by equity investor in exchange for debt instrument.
    - Value of second transaction = domestic currency value of equity acquired by nonresident investor.
  - Note (footnote 18): There will be a discrepancy, in terms of domestic currency, between the value of the financial instrument received by the investor and the value at which he acquired the debt instrument from the original creditor when the debt instrument is converted into domestic currency at the market exchange rate; this discrepancy should be viewed as a favorable exchange rate involving an implicit subsidy granted by the authorities to the equity investor (paragraph 543 and footnote 18).

### Borrowing for balance of payments support (paragraph 544)
- Definition: Borrowing (including bond issues) by government or central bank (or by other sectors on behalf of the authorities) to meet balance of payments needs.
- Analytic presentation:
  - Drawing of such a loan or bond issue: recorded below the line as a credit entry under exceptional financing.
  - Subsequent repayments: recorded above the line.
  - Advance repayments for balance of payments purposes are also recorded under exceptional financing (paragraph 544).

### Rescheduling and refinancing (paragraphs 545–547)
- Definitions:
  - Debt rescheduling: formal deferment of debt service payments with new and extended maturities applied to deferred amounts.
  - Debt refinancing: conversion of an original debt, including any arrears, into a new loan (paragraph 545).
- Standard presentation:
  - Appropriate debit entries depend on the recording period in which obligations fall due.
  - Corresponding credit contra entries recorded under other investment-liabilities-loans (long-term) in the financial account to reflect drawing of a new loan.
  - For rescheduling of obligations past due (arrears): debit under other investment-other liabilities (short-term).
  - For rescheduling/refinancing of obligations due in the current recording period: debit under appropriate debt instruments in the financial account for reduction of principal and any interest accrued in previous recording period; interest accruing in current recording period: debit recorded in current account under investment income.
  - For rescheduling of obligations not yet due: debit entries recorded under appropriate debt instruments in the financial account; no entry for interest not yet due (paragraph 545).
- Timing/conditions:
  - Some restructurings link rescheduling of obligations due beyond the current recording period to fulfillment of specified conditions by the time obligations fall due; entries recorded only when conditions are met (paragraph 546).
- Analytic presentation:
  - Only rescheduling/refinancing arising from balance of payments needs is recorded below the line.
  - Reschedulings/refinancings of debt falling due in current recording periods and in arrears: recorded below the line as credit entries under exceptional financing; offsetting debit entries above the line, except when arrears are rescheduled/refinanced—then debit entries also recorded below the line.
  - For obligations not yet due: only entries above the line under appropriate debt instrument (paragraph 547).

### New money facilities (paragraphs 548–549)
- Definition: New loan facilities included in debt restructurings that may be used for payment of existing debt service obligations.
- Standard presentation:
  - Successive drawings on new money facilities are usually recorded under other investment-liabilities-loans-monetary authorities (long-term) in the current recording period as a credit for the debtor.
  - Offsetting debit entries made under reserve assets.
  - As debt service payments are made on loans included in restructuring:
    - Debit entries recorded under investment income in the current account for interest payments.
    - Repayment of principal, interest accrued in previous recording period, and arrears (if any) recorded under appropriate liability (paragraph 548).
- Analytic presentation:
  - Entries are the same as described for rescheduling/refinancing in paragraph 547 (paragraph 549).

*Source: APPENDIX III, paragraphs 526–549 of the provided chapter excerpt.*

### APPENDIX IV

### APPENDIX IV — Balance of Payments Accounting for Selected Exceptional Financing Transactions

### Accounting entries for selected exceptional financing transactions (overview)
- The appendix provides analytic and standard balance of payments entries (credit and debit) for a range of exceptional financing transactions, including:
  - Accumulation of arrears (interest, amortization, other)
  - Repayment of arrears (interest, amortization, other)
  - Debt forgiveness (payments falling due in the current recording period; payments in arrears; payments not yet due)
  - Other intergovernmental grants (only intergovernmental grants received to finance balance of payments need are considered exceptional financing)
  - Debt/bond swaps (payments falling due, payments in arrears, payments not yet due)
  - Debt/equity swaps (direct swaps and indirect swaps)
  - Borrowing for balance of payments support (drawings on new loans; bond issues)
  - Rescheduling and refinancing (payments falling due, payments in arrears, payments not yet due)
- Presentation note: the table shows separate debit and credit entries for financial account items for illustrative purposes; in practice net recording is recommended for financial account items, so offsetting entries affecting the same item will not appear separately in a balance of payments statement.
- Specific recording conventions and footnotes (as given in the source):
  - For interest accrued in the current recording period, use the entry indicated by footnote 3.
  - For interest accrued in the previous period, use the entry indicated by footnote 4.
  - Cash settlement only for certain cases as noted in footnote 5.
  - Grants received from Fund subsidy accounts are included as exceptional financing transactions (footnote 6).
  - Payments under swaps are recorded using the market price of the new security issued (footnote 7) or the price at which the claim was acquired by the nonresident equity investor (footnote 8), as appropriate.
  - Indirect swaps may exchange a fixed-payment foreign-currency liability for a domestic-currency security, a foreign-currency security, or domestic deposits; the appropriate debit entry depends on the liability exchanged (footnote 9).
  - Borrowing (including bond issues) by authorities or other sectors on the authorities’ behalf to finance balance of payments need is recorded as exceptional financing (footnote 10).
- Instrument classifications used in the table include: Other investment, liabilities, loans (long-term); Other investment, liabilities (short-term); Portfolio investment, liabilities, debt securities; Direct investment, equity capital; Reserve assets; Capital transfers, debt forgiveness; Investment income, other.

### Introduction and purpose
- The Manual’s preceding sections develop concepts underlying the standard components of the balance of payments and the international investment position, emphasizing links between international transactions and the domestic economy.
- Two-way links emphasized:
  - (i) from the external to the internal side of the economy
  - (ii) from changes in domestic economic conditions to changes in transactions with the rest of the world
- Emphasis on analyzing factors influencing external transactions and the sustainability of those factors, plus implications of balance of payments adjustments for economic policy.
- Assumption for this appendix: international and domestic transactions are largely unconstrained by formal or informal controls and market participants respond to price signals and macroeconomic policies.

### General framework and key identities
- Current account identity in terms of saving and investment:
  - (1) CAB = X – M + NY + NCT = S – I
    - where X = exports of goods and services
    - M = imports of goods and services
    - NY = net income from abroad
    - NCT = net current transfers
  - Implication: the current account balance mirrors domestic saving (S) and investment (I) behavior; any change in current account must be matched by a change in S–I.
- Alternative expression using gross national disposable income and absorption:
  - (2) GNDY = C + I + G + CAB
  - (3) A = C + I + G = domestic absorption or expenditure
  - (4) CAB = GNDY – A
  - Implication: improving the current account requires releasing resources via a fall in domestic absorption (A) relative to income (GNDY), or raising national income without a commensurate rise in absorption.
- Caution on interpreting identities:
  - Equations are identities defining relationships; they do not by themselves describe behavioral responses (e.g., increases in GNDY may induce increases in A, offsetting any direct effect on CAB).
  - Understanding spending propensities is necessary for analyzing balance of payments developments.
- Private and government sector decomposition:
  - Private saving and investment: Sp and Ip; government saving and investment: Sg and Ig
  - (5) S – I = Sp + Sg – Ip – Ig
  - (6) CAB = (Sp – Ip) + (Sg – Ig) = S – I
  - Implication: persistent government dissaving not offset by private saving can cause current account deficit; the government budgetary position (Sg – Ig) can be an important influence on CAB.
  - Policy analysis must consider behavioral links (e.g., tax changes affect private saving and private investment) before inferring effects on CAB from (6).
- Financial transactions and reserve assets:
  - Financial transactions include direct investment, portfolio investment, other investment (trade credits, loans, deposits), and reserve assets.
  - Direct linkages exist between current transactions and financial transactions (e.g., imports financed by nonresident suppliers create financial inflows; repayment involves reserve drawdowns or replacing liabilities).
  - Example linkage across financial account items: proceeds from foreign bond sales may be temporarily invested abroad.
- Overall balance of payments identity (assuming net capital transfers = 0 and no statistical discrepancies):
  - (7) CAB = NKA + RT
    - where NKA = net capital and financial account (all capital and financial transactions excluding reserve assets)
    - RT = reserve asset transactions
  - Interpretation: the current account balance must be matched by changes in net claims on the rest of the world (financial account and reserve assets). A CAB surplus is reflected in an increase in net claims or acquisition of reserve assets; a deficit requires liquidation of foreign assets or increased liabilities.
- Exchange rate regime implications:
  - Under a pegged exchange rate, reserve asset transactions are determined by net demand/supply of foreign exchange at the peg (RT = CAB – NKA).
  - Under a pure float (no intervention), CAB = NKA.
  - Under a managed float, reserve assets are used to achieve a desired exchange rate path.

*APPENDIX IV — Balance of Payments Accounting for Selected Exceptional Financing Transactions*

### section includes information on this topic.)

### The Capital and Financial Account and Balance of Payments Financing

### Role of the capital and financial account
- Paragraph 560: The capital and financial account measures net foreign investment or net lending/net borrowing vis-à-vis the rest of the world and is one channel through which a country invests its net wealth; the other channel is primarily tangible domestic capital.
- Paragraph 560: The current account equals the difference between total domestic saving and investment; equation (8) is presented as:
  - (8) S–I = NKA+RT
- Paragraph 561: Equation (8) describes flows of resources and capital over time; the summation of a country’s saving over an extended period provides a picture of the stock of its total wealth.
- Paragraph 561: A nation’s stock of assets consists of nonfinancial and financial assets; as financial assets and liabilities of domestic sectors cancel, a country’s balance sheet consists of its stock of domestic nonfinancial assets plus its net international investment position (the stock of external financial assets minus the stock of external liabilities).

### Valuation, adjustments, and links between stocks and flows
- Paragraph 562: The net international investment position at the end of a period reflects financial flows (right-hand side of equation (8)), valuation changes, and other adjustments during the period, which affect the current value of total private and official claims on nonresidents and liabilities to nonresidents.
- Paragraph 562: Valuation and other adjustments are omitted from this discussion to focus on links between stocks of claims and liabilities vis-à-vis nonresidents, changes in these stocks, and the current account.
- Paragraph 563: Financial flows change foreign claims and liabilities; these financial stocks earn rates of return (interest, dividends, or profits) that appear in the current account as investment income, creating a dynamic link between the financial account and future current account positions.

### Dynamics of current account deficits and financing risks
- Paragraph 563: A current account deficit must be financed by some combination of an increase in liabilities to nonresidents and a reduction in claims on nonresidents so net foreign assets decline; this reduces net investment income (unless rates of return adjust) and can increase the current account deficit, potentially destabilizing unless policy or variable adjustments occur.
- Paragraph 566: Illustration (starting from S = I initially): an autonomous increase in domestic investment (from a rise in capital productivity) not matched by saving causes interest rates to rise (unless pegged by monetary authorities) and a current account deficit financed by net financial inflow induced by higher domestic interest rates.
- Paragraph 568: If foreign financing funds productive investment, the country can likely service the change in net foreign investment position without major policy changes; productive investment must be profitable and enhance debt-servicing capacity.

### Determinants of financial flows and investor behavior
- Paragraph 564: Determinants of financial flows relate mainly to factors affecting the rate of return and risk on foreign and domestic assets: interest rates, profitability of direct and other investments, expected exchange rate changes, and tax considerations; these are embodied in the expected real after-tax rate of return on foreign assets.
- Paragraph 565: Domestic and nonresident investors are largely influenced by the same set of factors affecting rates of return on domestic investments; thus, stocks of claims on nonresidents and liabilities to nonresidents may be assumed influenced by the same considerations (subject to caveat in footnote 19 regarding capital controls).

### Sources of financing for current account deficits
- Paragraph 567: Financial inflows financing an excess of investment over saving may take the form of:
  - foreign direct investment,
  - loans from foreign banks,
  - bonds issued in international capital markets,
  - or induced portfolio inflows due to higher domestic interest rates attracting funds if investors view economic prospects favorably.
- Paragraph 569: If investment is unchanged but domestic saving declines (e.g., larger public deficits or higher private consumption), higher interest rates may not attract inflows if investors judge policies unsustainable.
- Paragraph 570: In the absence of spontaneous private inflows, necessary actions include:
  - policy measures to attract private funds (enhance domestic environment for long-term investment),
  - use of reserve assets for balance of payments financing,
  - implementation of balance of payments adjustment measures.
- Paragraph 570: Raising domestic interest rates can induce funds to flow in and dampen excess demand, but such financing may be undependable long-term if foreign monetary conditions change.

### Limits of reserves, confidence, and risks of reversal
- Paragraph 571: Appropriateness of using reserve assets to finance a gap depends on whether the gap is temporary/reversible; owned or borrowed reserve assets are limited.
- Paragraph 571: Reserve assets can buffer temporary shocks (poor harvests, supply disruptions) and seasonal swings, smoothing resident expenditures; persistent deterioration in the current account still necessitates adjustment despite temporary financing.
- Paragraph 572: Limits on private and official financing:
  - If stock of reserve assets is low relative to the current account deficit and expected to be exhausted within investors’ horizons, probability of depreciation or adverse policy increases.
  - Private funds financing a deficit could rapidly switch from net inflow to net outflow.
  - Unless adjustment reverses both the current account deficit and financial account outflow, reserve assets may be needed to finance both an excess of domestic investment over saving and a net increase in claims on nonresidents, risking loss of currency confidence and rapid reserve exhaustion.

### Balance of payments adjustment: scope and instruments
- Paragraph 573: Many situations make sustained reliance on private and official financing infeasible; adjustment measures may be necessary to achieve a viable external payments position (a deficit on goods and services financeable by transfers, private capital inflows, and some reserve use).
- Paragraph 574: Equation (8) rewritten as:
  - (9) S–I = CAB = TB+SIB+TRANB = NKA+RT
    - where TB = trade balance
    - SIB = service and income balance
    - TRANB = current transfer balance
- Paragraph 574: Magnitude of necessary adjustment depends on the composition of the current account; persistent trade deficits financed by borrowing often entail deficits on the service and income balance; current transfers (official and private) that are long-term and reliable can reduce the required adjustment.

*Source: _bopman - section includes information on this topic.)*

### APPENDIX V

### APPENDIX V

### External debt amortization and adjustment timing
- Foreign debts must be paid in the future; the amortization schedule is an important factor for judging sustainability of a balance of payments position (paragraph 575).
- 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 adjustment measures beforehand to avoid more drastic measures required for dealing with a subsequent balance of payments crisis (paragraph 575).

### Exchange rate depreciation as an adjustment measure
- In the face of an unsustainable current account deficit, a depreciation of the exchange rate of the domestic currency should be considered (paragraph 576).
- Mechanism described:
  - Depreciation offsets a domestic price rise relative to prices abroad that penalizes exports and encourages imports (paragraph 576).
  - Depreciation raises prices of traded goods relative to non-traded goods and services, promoting substitution of domestic products for imports and stimulating foreign demand for domestic output (paragraph 576).
  - Depreciation is typically accompanied by a rise in domestic prices due to higher cost of imported goods and stronger demand for exports and import substitutes, which can partially or fully erode competitiveness gains from the exchange rate change (paragraph 576).
- Policy implication:
  - Exchange rate adjustment should be supplemented with restrictive monetary and fiscal policies to facilitate the resource shift signaled by the change in relative prices (paragraph 576).
  - Expenditure-switching policy via depreciation generally must be supported by expenditure-reducing measures, especially if there is no excess capacity in the economy (paragraph 576).

### Savings–investment gap and role of monetary policy in adjustment
- Any improvement in the current account must be matched by a corresponding positive change in the difference between domestic saving and investment (reference to equation (9), paragraph 577).
- Effects of depreciation on saving–investment gap:
  - If monetary policy stance is unchanged, depreciation increases demand and demand for money, which with an unchanged money supply tends to increase nominal and real domestic interest rates (paragraph 577).
  - Higher interest rates dampen interest-sensitive expenditures and can positively affect domestic saving (paragraph 577).
  - This induced effect is unlikely by itself to be sufficient—particularly at full employment—to achieve desired current account improvement (paragraph 577).
- Conclusion:
  - Exchange rate adjustment will most likely need to be accompanied by measures to reduce domestic expenditure through tighter monetary and fiscal policies to release resources to exporting and import-substitution industries (paragraph 577).

### Fiscal policy design and potential pitfalls
- Fiscal deficits can be a potential cause of external imbalances (reference to equation (6), paragraph 578).
- Fiscal measures may be mandated to reduce the saving/investment gap if depreciation does not induce sufficient change (paragraph 578).
- Design cautions:
  - Cuts in infrastructure investment may achieve short-run balance of payments effects but can harm long-run supply potential (e.g., transportation, energy bottlenecks) (paragraph 578).
  - Tax measures that raise very high marginal tax rates or target capital income can induce reductions in private saving and reduce incentives to invest, producing undesired outcomes (paragraph 578).
- Recommended fiscal actions:
  - Reduce or eliminate subsidies to inefficient government enterprises and the private sector (paragraph 578).
  - Cut back on government activity that can be performed equally well or better by the private sector (paragraph 578).

### Monetary policy stance and reserve dynamics
- Monetary policy should ensure interest rates are generally positive in real terms to provide incentives to savers and stability to encourage investment (paragraph 579).
- Objective from the perspective of balance of payments: limit domestic spending to what is available from domestic resources and foreign financing (paragraph 579; reference to equation (4)).
- Link between reserve asset transactions and domestic monetary conditions (paragraph 580):
  - A decline in reserve assets may be associated with a current account deficit and/or a net financial outflow caused by expansionary monetary policy (paragraph 580).
  - Reserve asset decline can reduce the monetary base, tightening monetary policy, leading to higher interest rates that dampen domestic demand and make domestic assets more attractive (paragraph 580).
  - The built-in adjustment can be short-circuited if monetary authorities offset reserve losses by increasing the domestic component of the monetary base (e.g., open market purchases of securities held by the banking system) (paragraph 580).
  - Such offsetting action prevents domestic interest rates from rising and contributes to persistence of the balance of payments deficit (paragraph 580).

### Surplus balance of payments: causes and considerations
- Analysis focuses mainly on deficits because they are more prevalent, but surplus situations also merit analysis (paragraph 581).
- Balance of payments identity (reference to equation (7)) implies a current account surplus is reflected in:
  - an increase in net claims held by the private sector or government on nonresidents (NKA), and/or
  - an increase in official reserve assets (RT) (paragraph 582).
- A surplus may result from a reduction in liabilities to nonresidents rather than an increase in gross claims; this can be desirable if it reduces a prior large debt service burden (paragraph 582).
- Surplus arising from excess domestic saving over domestic investment:
  - If government fiscal position is in deficit, private sector saving will exceed domestic investment; part of domestic saving allocated to foreign assets may reflect higher marginal returns abroad (paragraph 583).
  - Buildup of net claims on nonresidents can be efficient if driven by market forces rather than government policies (paragraph 583).

### Policy distortions that can bias toward surplus
- Government policies that distort saving/investment decisions can bias payments toward a surplus (paragraph 584).
- Examples of distortive measures:
  - Tariffs and quotas limiting imports (paragraph 584).
  - Restrictions on payments abroad (paragraph 584).
  - Export subsidies and procurement preferences for domestic producers (paragraph 584).
  - Exchange market intervention deliberately undervaluing the currency to achieve a current account surplus (paragraph 584).
  - Measures that limit foreign acquisition of domestic assets, biasing the financial account toward net outflow and shifting the current account toward surplus (paragraph 584).
- Note that these measures may not be successful in achieving a larger current account surplus (paragraph 585).

*Source: APPENDIX V, BALANCE OF PAYMENTS MANUAL (selected paragraphs 575–585).*

### APPENDIX V

### APPENDIX V

### Analysis of persistent current account surpluses (paragraphs 586–588)
- 586: A current account surplus, even if entirely a response to market forces, may cause economic difficulties (example: “Dutch disease”).
  - Natural resource discovery or substantial improvement in terms of trade can lead to expanding resource sector, an improvement in the current account, and appreciation of the exchange rate.
  - Appreciation tends to make other sectors contract and be less competitive internationally.
  - If resource gains are expected to be transitory, it may be appropriate to protect adversely affected sectors.
  - One policy tool to moderate appreciation is exchange market intervention; accumulation of reserve assets tends to insulate the real economy from short-run disturbance.
- 587: When no government policy actions aim to achieve a surplus, it is difficult to conclude an economy is investing too much of its saving abroad; easier to assess reserve assets.
  - A current account surplus can be reflected in a buildup of foreign reserve assets rather than a rise in private net foreign assets.
  - Accumulation of reserve assets represents government foreign exchange market intervention (sale of domestic currency for foreign currency).
  - Intervention tends to keep the foreign exchange value of the domestic currency lower than it otherwise would be, limiting currency appreciation and preventing the self-correcting mechanism that would reduce the current account surplus.
- 588: Appraisal of external reserve assets held by monetary authorities is an aspect of balance of payments analysis for countries with persistent current account surpluses.
  - Accumulation of reserve assets is excessive if assets exceed, by a wide margin, the amount required to finance short-run balance of payments deficits.
  - In such situations, resources may be better invested in domestic capital formation.
  - If private and government sectors are unlikely to increase domestic capital formation, cessation of reserve asset accumulation would lead to an increase in domestic absorption and/or to a rise in net foreign investment by domestic residents.
  - Allocation of the economy’s resources would tend to be more efficient as the allocation would be responding to market forces.

### Policy implications and recommended actions (paragraphs 586–588 and contextual text)
- Identify and remove distortionary measures that are deliberately aimed at achieving a surplus; such distortions will, over time, produce offsetting movements in other balance of payments components.
- If, after elimination of distortions, a persistent surplus remains, evaluate whether:
  - Private saving or government saving is excessively high, or
  - Domestic investment is too low.
  - (The text notes it is considerably more difficult to establish these conditions than to identify direct distortions related to international transactions.)
- For cases of “Dutch disease”:
  - Consider temporary protection of adversely affected sectors if resource gains or terms of trade improvements are transitory.
  - Use exchange market intervention to prevent or moderate exchange rate appreciation when appropriate.
- For reserve asset accumulation:
  - Appraise level of external reserve assets held by monetary authorities.
  - Determine required reserve assets to finance short-run balance of payments deficits; treat accumulation beyond that requirement as potentially excessive.
  - Consider reallocating resources from excessive reserve accumulation to domestic capital formation or allow cessation of reserve accumulation to raise domestic absorption or net foreign investment by residents.

### Special cases and caveats (paragraphs 586–588 and note 22)
- Note 22: For countries that are large exporters of nonrenewable resources (for example, oil):
  - Domestic investment opportunities may be limited; buildup of foreign assets can be viewed as diversification of the country’s stock of wealth rather than as reserve accumulation for balance-of-payments financing.
  - There may be a case for accumulation of reserve assets in the instance of Dutch disease if effects are expected to be transitory.

### Selected index topics related to balance of payments analysis (extracted from the appended index)
- Balance of payments concepts and uses: balance of payments identity (paragraphs listed), balance sheets, standard components, analysis framework (paragraphs 551–559).
- Current account and related items: Current account balance (CAB), Current account deficit and surplus analysis (paragraphs and cross-references listed).
- Reserve assets and reserve position: identification, classification, valuation, availability for use, interpretation of changes (paragraphs 424–445, 431, 436, 444).
- Capital and financial account coverage and timing, valuation of financial instruments, direct investment and portfolio investment treatment, and implications for financing (paragraph ranges and cross-references listed).
- Time of recording, valuation principles, and regional allocation principles affecting analysis and interpretation (numerous index entries and paragraph ranges).

*Source: APPENDIX V of the provided Balance of Payments Manual excerpt.*

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