International accounts, Q1 2011

The BOP is a statistical statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year. The IIP is a statistical statement that shows at a point in time the value of financial assets of residents of an economy that are claims on nonresidents, and the liabilities of residents of an economy to nonresidents. The difference between the assets and liabilities is the net position in the IIP and represents either a net claim on or a net liability to the rest of the world.

The Norwegian BOP and IIP is presented in accordance with the latest internationally approved guidelines. These are specified in "The Balance of Payments Manual, 6th edition" (BPM6), published by the International Monetary Fund (IMF). The underlying principles and definitions presented in the BPM6 are in full accordance with the international statistical framework for the National Accounts, as laid down in the manual "System of National Accounts 2008" (2008 SNA). 2008 SNA is a joint publication by several international organizations, including the United Nations and the IMF.

The European Union (EU) has compiled its own edition of the National Accounts manual, "European System of Accounts 2010" (ESA 2010), which accommodates special conditions in member countries. According to the European Economic Area Agreement (EEA Agreement), Norway is obligated to comply with ESA 2010. The reporting of National Accounts data, as well as BOP and IIP data, to EU's statistical office Eurostat, has a legal basis in regulation (EC) No 184/2005.

Basic concepts and recording principles

Like the National Accounts, the BOP and IIP accounts are constructed around three basic concepts: statistical units, economic values and transactions. Briefly, the accounting systems describe transactions and positions between statistical units in which economic values are provided or received in exchange for other economic values.

-          Statistical units are institutional units which make economic decisions on an independent basis and can present complete accounts for their activities. The institutional unit normally coincides with a body corporate, e.g. a limited liability company or legal person.

-          Economic items can either be real resources, i.e. goods and services, or financial items representing various claims and liabilities.

-          The basic criterion for entering a transaction in the BOP or a position in the IIP, is that it involves an exchange between a domestic entity (resident) and a foreign entity (non-resident). Residents are institutional units that engage and intend to continue to engage in economic activities and transactions within a country's territory, with one year or more serving as the conventional guideline.

Positions

Positions are shown as the value of a financial item which, for example, an enterprise is in possession of at a point in time. Financial objects can be, for example, shares, other securities or different types of loans. In principle, stocks must be registered at market value. See description of valuation below.

Transactions

A transaction should in principle be allocated to the period in which there is a change of ownership of the economic value. Conventionally, it is often said that a change of ownership has taken place when both parties of the transaction enters the transaction in their books or accounts. In the case of exports and imports of goods, it is the moment that the goods cross the border and are registered through customs declarations, that determines the time of recording of the transaction and consequently the change of ownership.

All transactions shall be valued at market prices. Market prices are defined as amounts of money that buyers pay to acquire something from sellers; the exchanges are made between independent parties and based on commercial considerations only. Total exports and total imports shall be recorded at free-on-board (f.o.b.) prices. F.o.b prices are the value when passing the border of the country of exports. On a detailed commodity level, cost-insurance-freight (c.i.f.) prices are used for imports, i.e. including transport and insurance costs up to the border of the importing country. The exchange rate on the transaction date or the average rate for the shortest period applicable shall be used for converting transactions in foreign currencies into the national currency. Stocks of assets and liabilities are to be valued at prices or rates in effect at the time to which the balance sheet relates.

Other changes

Income and expenditure are defined in the National Accounts and BoP excluding gains and losses, irrespective of whether they are realised or unrealised. Such items, however, help to explain total balance sheet changes that take place during a period and are registered on the account for revaluation.

Income and expenditure

Income and expenditure are defined in the National Accounts and BoP excluding gains and losses, irrespective of whether they are realised or unrealised. Such items, however, help to explain total balance sheet changes that take place in the course of a period and are registered on the account for revaluation.

Assets and liabilities

Assets and liabilities are the components of the balance sheets of the total economy and institutional sectors. In contrast to the accounts that show economic flows, a balance sheet shows the positions of assets and liabilities held at one point in time by each unit or sector or the economy as a whole.

An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of carrying forward value from one accounting period to another.

A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor).

Double entry bookkeeping

International Accounts are based on the rules for double entry bookkeeping. All transactions are represented by two entries, a credit and debit entry. Most transactions are those in which economic items are provided or received in exchange for other economic items, entailing that offsetting credit and debit entries will normally be registered.

For example, exports of a good will be registered in External Trade Statistics and recorded as a credit entry in the current account, whereas the accompanying increase in foreign assets, e.g. in the form of increased deposits abroad, is registered in financial account and recorded as a transaction on the debit side of the BOP accounts. In other cases when items are given away rather than exchanged, or a recording is one-sided for other reasons, there is only one recording in the data sources. In these cases, a counter entry is constructed, in this example in the form of a transfer so that the double entry requirement is satisfied.

Structure

The International Accounts is an integrated part of the National Accounts and is constructed as a mirror image of the institutional sector "Rest of the World" in the National Accounts. In the BOP and IIP, transactions and positions are seen from Norway's point of view, while in the institutional sector accounts they will be seen from the perspective of the rest of the world. A surplus on Norway's current account will in the National Accounts appear as a deficit for the sector "Rest of the World".

The BOP consists of three main parts: a current account, which shows current transactions with the rest of the world, a capital showing capital transactions, and a financial account, which records investment transactions in the form of purchases and sales of financial instruments.

The table below illustrates the statement of transactions and positions in the BoP and IIPs (eller IAs) current, capital and financial accounts:

1)            Current account balance

Balance of goods and services
Balance of income and current transfers

2)            Capital transfers to abroad, net

3)            Net lending, current- and capital account

4)            Financial account, assets/liabilities

Direct investment
Portfolio investment
Other investment
Reserve assets

5)            Net lending, financial account

6)            Errors and omissions

The financial statements are presented as shown in the following table, broken down by functions (direct investment, portfolio investment, other financial investment and international reserves):

7)       The financial position of at the beginning of the reference period

8)      Investments during period (asset)

9)      Borrowing

10)    Gains, losses and other changes (netto)

11)    The financial position of at the end of the reference period

Following definitions applies

The relationship between current- and capital account and the transactions in the financial account:

1+ 2 =3

4 assets – 4 liabilities = 5

3 – 5 = 6

Consistent International Accounts requires:

 (3) = (5)

The relationship between positions and change in positions in the financial account:

7 + 8 – 9 + 10 = 11

Description of the accounts

The definitional relationship between the current account and the financial account is that a current account surplus, adjusted for net capital transfers and net acquisitions of patents and copyrights etc, increases net foreign assets (or reduces net liabilities), while a deficit on the current account will reduce net assets (or increase net liabilities).

The current account comprises, first, exports and imports of goods and services, with the balance of goods and services as a balancing item. In addition, data are provided for compensation of employees, investment income and expenditure as well as current transfers to and from the rest of the world. The balance for this component is net income and current transfers. The total balance of the current account is the sum of the balances of these two components.

The capital and financial account shows how transactions recorded in the current account result in changes in foreign assets and liabilities, and in addition to purchases and sales of financial instruments includes capital transfers. This entails that the balance on the current account must be adjusted for net capital transfers in order to arrive at net lending.

The financial account also includes transactions that do not have a counter entry in the current account. One example would be a resident who uses funds in a foreign bank account to repay a loan raised abroad.

Net lending

Total asset transactions less total liability transactions result in net lending. By adjusting net lending for valuation changes and other balance sheet changes not caused by transactions2, we arrive at changes in Norway's net foreign assets/liabilities.

Net lending, current account =
Current account balance + Capital transfers to abroad, net - non-financial net investment (?)

Net lending, financial account = Net acquiring of financial assets – net borrowing

Net errors and omissions are derived from net lending from the two accounts and can be derived from the current account minus the same item derived from the financial accounts. Although the BoP accounts are, in principle, balanced, imbalances occur due to imperfections in source data and compilation.

In addition to the classifications and categories described in the international BOP, IIP and National Accounts manuals, it may be mentioned that the Norwegian BOP, IIP and National Accounts make use of the product classification CPA (Classification of Products by Activity) of the EU and sector of the BPM6, 2008 SNA and ESA 2010. For more details, please check https://www.ssb.no/en/klass/klassifikasjoner/39.

Country Codes are based on the International Standard ISO 3166.

Functional categories

Direct investment

Direct investment is a cross-border financial investment made by an investor for the purpose of acquiring a lasting interest in a foreign enterprise, and exerting a degree of influence on that enterprise's operations. An investment by owning 20 per cent or more of the ordinary shares is considered always a direct investment. The establishment of a subsidiary abroad is an example of a direct investment.

Portfolio investment

Portfolio investment covers transactions in equities, other securities, and financial derivatives, except where these transactions relate to direct investment or reserve assets category. The Government Pension Fund – Global is not part of the reserve assets, though it is owned by the government and administrated by Norges Bank. This is therefore treated as portfolio investment as concerns investment abroad. Most important are shares and other equities, bonds and money market instruments (certificates and Treasury bills).

Other investments

Other financial investments is a residual category that covers all investments that are not included in direct investment, portfolio investments and international reserves.

Reserve assets

Reserve assets consist of those external assets that are readily available to and controlled by monetary authorities for direct financing of payment imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate and /or other purposes. In Norway, Norges Bank have reserve assets. International reserves basically consist of assets only, i.e. any foreign central banks' holdings of assets in Norway (for instance Norwegian securities) are not considered "reserve liabilities", but as portfolio investment in Norway.

The classification of financial assets and liabilities

The financial accounts include a limited number of financial instrument groups with detailed claims and debt items in the balance sheets of institutional units. The financial instrument links one entity claims to another sector’s debt items. The financial instruments are grouped in claim and debt items with similar economic functions. For example, the payment function is characteristic of coins, notes and salary accounts, while credit is procured through different types of loans. In addition, the liquidity ratio has been the determinant factor for the ranking of financial assets in the classification.

Classification of financial assets and liabilities in the financial accounts is based on the recommendations of the SNA 2008 and ESA 2010. The classifications are described below:

Equity and other shares

The instrument includes ordinary shares in limited liability companies, shares in general partnerships and shares in mutual funds. Shares in foreign companies are also included. Furthermore, the instrument includes tradable Norwegian equity certificates and general government capital contributions in public enterprises and the state lending institutions.

Dept securities

Comprise short and long-term securities. Short-term securities is defined as negotiable securities with original maturity of maximum one year, while long-term securities comprise instruments defined as tradable standardised debentures with original maturity of more than one year.

Currency and deposits

Comprise Norwegian and foreign notes and coins, all types of deposits with commercial banks and savings banks, Norges Bank and foreign banks.

Loans

This financial instrument includes lending forms other than tradable debentures and certificates. Short-term loans are mainly quantified on the basis of the specifications in accounting statistics for financial corporations. The instrument comprises building loans, factoring, bank overdrafts, operating and working credit. Long-term loans comprise all loans other than short-term loans (mortgage bond issues, other medium and long-term repayment loans and financial leasing).

Trade credits

Financial claims arising from the direct extension of credit by suppliers and buyers for goods and services.

Insurance technical reserves

The instrument includes individual insurance savings and group insurance savings in private life insurance companies and total capital in autonomous municipal and private pension funds. Prepayments of premiums and reserves against outstanding claims in non-life insurance companies are also included.

Other claims

Comprise claims and debt that is due to differences in timing between transactions and payments. For example credit extended to a customer/supplier credit, deferred tax claims/liabilities. Included are also other financial items that do not belong to the previously listed instruments. Derivatives recorded in the accounting statistics are included.

Reserve assets/liabilities IMF

The foreign exchange reserves and claims on the International Monetary Fund (IMF) together constitute Norges Bank's international reserves. Claims on the IMF consist of three components: SDR accounts (Special Drawing Rights), reserve positions in the IMF and loans to the IMF (Poverty Reduction and Growth Facility).

Valution

Market value

Market prices are defined as amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commercial considerations only. The exchange rate on the position date or the average rate for the shortest period applicable shall be used for converting positions in foreign currencies into the national currency. Stocks of assets and liabilities are to be valued at prices or rates in effect at the time to which the balance sheet relates.