5331.0 - Balance of Payments and International Investment Position, Australia, Concepts, Sources and Methods, 1998  
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Contents >> Chapter 2. Conceptual framework >> Types of transactions in the balance of payments

2.22. An economic transaction occurs when something of economic value is provided by one party to another. Transactions that are considered to have economic value comprise those in goods, services, income and financial assets and liabilities. The transactions recorded in a balance of payments statement stem from dealings between two parties, one usually being a resident and the other a non-resident. The types of transactions included in the balance of payments are exchanges, one-sided transactions and imputed transactions.

Exchanges

2.23. Exchanges are the most important and numerous type of transaction. They include transactions in which one transactor provides something of economic value to another transactor and receives in return something of equal value.

One-sided transactions

2.24. One-sided transactions refer to gifts, grants, taxes etc. where one transactor provides something of economic value to another, but does not receive a quid pro quo to which an economic value can be assigned. To maintain the double entry system of accounting, the value provided is matched in the accounts by an offsetting entry which is referred to as a transfer. A significant example of a one-sided transaction is migrants’ transfers (described in box 2.7).


2.7 MIGRANTS' TRANSFERS
A special statistical treatment is required when a person migrates, that is when the person’s status changes from non-resident to resident (or vice versa). When this change occurs, the property owned by the migrant becomes the property of a resident instead of that of a non-resident (or vice versa). This change of ownership of net worth between economies is included in the balance of payments. For example, any financial assets held abroad by the migrant become claims by Australia on the rest of the world. Offset entries are made corresponding to the transfer of net worth and, by their nature, these are included as transfers in the capital account. This treatment amounts to envisaging a transfer of property from the person in their capacity as a non-resident to the person in their capacity as a resident (or vice versa). In principle, this transaction embraces all the migrant’s property, whether or not it accompanies the migrant. However, the way in which Australian investment abroad is estimated will not usually capture the increased resident household investments abroad. In practice only cash flows are likely to be recorded through the banking system, whereas the source of the transfers entries made to offset the cash flows appear elsewhere in the accounts.

Special cases of imputation/estimation

2.25. A number of special cases of imputation/estimation feature in balance of payments compilation. One case involves the reinvestment of earnings in resident enterprises by their non-resident direct investors. These reinvested earnings are regarded as being paid out as investment income and then reinvested in the enterprises from which they originated. They are, therefore, recorded both as a component of investment income in the current account and as a component of direct investment in the financial account. It is considered analytically useful to identify these transactions separately in economic statistics because of the substantial contribution they make to the stock of direct investment finance in a country.

2.26. Another case involves imputation for financial intermediation services indirectly measured (FISIM). These consist of services that are provided by financial intermediaries but not explicitly charged. For example, whenever a financial intermediary lends money, a service is being provided, and the interest rate on the loan includes an implicit service element. The service charge may be imputed or derived from the difference between an appropriate reference interest rate and interest rates actually applied to loans (rates paid by borrowers) and deposits (rates received by depositors). They are equivalent to reclassifying a portion of interest as financial services. Estimates for FISIM are included in financial services in the balance of payments, and the offsetting adjustments are made to investment income. In Australia’s case the amounts involved are not significant. (For more details see paragraphs 7.21 and 7.22).

2.27. A further case relates to estimation for the implicit fees (financial services) associated with foreign exchange trading. Estimates of the implicit service fees being earned on foreign exchange trading with non-resident counterparties are made by splitting the total service fees reported by exchange traders into resident/non-resident shares using a number of assumptions and other published information.

Exceptions to change of ownership

2.28. In economic statistics, transactions are considered to occur when the goods and financial assets change ownership between transactors, when services are provided by one transactor to another, or when income is earned by one transactor from another. However, there are certain situations in which no change of ownership legally occurs, but where transactions are nonetheless considered to have occurred for balance of payments purposes. The situations include financial leases, goods imported into or exported from Australia for processing and return, and transactions between a head office in one country and a branch in another.

Financial leases

2.29. A financial lease is regarded as a method of obtaining all the rights, risks and rewards of ownership of real resources without holding legal ownership. Although legal ownership remains with the lessor during the term of the lease, all the risks and responsibilities apply to the lessee. In these cases, the basic nature of the transaction is given precedence over its legal form by imputing a change of ownership of the resource to the lessee. As a result of this imputation, a financial liability is recognised and lease payments are classified as partly loan repayments in the financial account and partly interest in the current account, rather than as services in the current account.

Goods for processing

2.30. In economic statistics, the value of goods entering or leaving Australia for processing and returning to the country of origin after processing should be recorded on a gross basis, i.e. recording the goods both when they enter (as imports) and when they leave (as exports), even though there is no legal change of ownership of those goods. Thus a good entering Australia to be processed and returned to the country of origin is recorded as an import at the appropriate value and subsequently as an export - recorded by the customs system at the original value plus the added value of the processing. A symmetrical treatment should be applied to Australian goods exported for processing and return. The basis for this treatment is that such goods lose their identity during processing by being transformed or incorporated into different goods. On the other hand, for goods undergoing repairs only the value of the repair, not the gross value of the goods, is included in the goods credits or debits.

Branches

2.31 In economic statistics, it is usually necessary to split the activities of a legal entity and recognise two units, a head office in one country and a branch in another. Flows of goods, services, income and finance between the branch and its head office are therefore treated as transactions, even though they are legally part of the same unit. For example, goods and services sent from the head office to its branch are to be treated as exports of goods and services by the head office.

2.32. There are two cases where such splitting becomes necessary. The first occurs when production of goods and services is undertaken by the personnel, plant and equipment of the legal entity in an economic territory outside the economic territory of the head office, provided certain conditions apply. These conditions include: the intention to operate in the separate economy indefinitely or over a long period (12 months is used as a rule of thumb); keeping a set of accounts of the branch’s activity (i.e. income statement, balance sheet, transactions with the parent entity); eligibility to pay income tax in the host country; having a substantial physical presence; and receiving funds for the branch’s work which are paid into its own bank account.

2.33. The second case occurs when a person or legal entity resident in one economy owns land and buildings located in another economy. Ownership of immovable assets is always attributed in balance of payments and international investment statistics to residents of the economy in which the assets are located. Thus land in the domestic territory, which is in fact owned by a non-resident, is treated as being owned by a notional resident entity which in turn has a foreign liability to the real owner. It should also be recalled that the territorial enclaves associated with embassies, military bases etc. are regarded as part of the economic territory of the economy they represent. When these institutions buy and sell the land in these enclaves they are effectively adding to and subtracting from the economic territory of their government. Such transactions in land owned by foreign embassies are recorded in the capital account as the acquisition/disposal of non-produced, non-financial assets.





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