5331.0 - Balance of Payments and International Investment Position, Australia, Concepts, Sources and Methods, 1998  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 22/09/1998   
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11.5. The general principles covering valuation and time of recording are set out in Chapter 2. These state that:

      • market prices should be used to value transactions and stocks;
      • where financial instruments are denominated in a foreign currency, these should be converted at market rates; and
      • the time of ownership change should be the basis of recording financial transactions and stocks.

11.6. Ownership changes when transactions are entered in transactors’ books. These should be recorded on an accrual basis, which means that certain items should be capitalised in the appropriate component of the financial account and international investment position. For example, income in the current account is recorded when earned. The difference between income earned and cash settlement when payment becomes due is included in the accounts as a net financial transaction in the underlying instrument (see box 11.1 for a description). Similarly, the prepaid premiums and unpaid claims on insurance (i.e. the difference between premiums earned and claims payable on the one hand, and premium and claim payments on the other) should be recorded as financial transactions. Every effort is made in data collections to adhere to these principles, and data in the financial account and international investment position are considered to approximate them. However, the valuation of portfolio investment transactions in shares and debt securities issued in Australia, which are compiled for recent years using data models, may in practice only approximate the true market transaction value. Some difficulty is also encountered in valuing the stock of investment, because survey reporters may not provide actual market values (especially for direct investment), or data models are used (in inward and outward portfolio investment) to estimate market values. Because of the relative newness of financial derivatives, data providers also experience some problems in reporting them.
        11.1 IMPACT OF ACCRUAL ACCOUNTING OF INCOME ON THE FINANCIAL ACCOUNT, AND ITS MEASUREMENT
        In the balance of payments, income should be recorded during the period or periods in which the economic benefits arising from the use of the factors of production are enjoyed by the user, and measure the use of those factors (see paragraph 8.1). Following from this concept of income, interest should be recorded on an accrual basis and not just at the time interest payments are actually made, and should reflect current market rates of interest in the accounting period. Entries are required in both the income account for the income accrued, and the financial account for the liability to settle the claim for payment of the income. The liability for the accrued interest is to be recorded as a transaction in the financial account in the instrument on which the income accrues.

        The implementation of full accrual accounting for income in surveys is complicated by the prevalence of historical cost accounting, and by the use of residual ‘accruals’ accounts and other accounting practices that do not meet statistical requirements. For non-tradable debt (e.g. trade credit, loans, deposits) it is assumed that historical cost is generally a reasonable approximation of current market rates, and data providers can report the amounts accrued over time. However, for tradable debt securities (bonds and notes and money market instruments), the differing accruals practices of data providers, and the asymmetries between counterparties in reporting the same transactions, mean that summing such reported ‘accrued’ amounts cannot produce meaningful statistics. In the Survey of International Investment, therefore, survey reporters are asked to report only the cash flows identified as interest. These cash flows are included in the financial account as settlement transactions. The accrued income, and the equivalent liability for settlement in the financial account, are calculated by the ABS using quoted market rates for the particular securities involved, or quoted average rates for an appropriate class of securities.

        For the international investment position, survey reporters are asked to report the levels of investment on a market value basis, which reflects income accrual. Where survey levels data are not reported on a market value basis, they are converted to that basis using actual market prices for the particular security or for an appropriate class of securities.

Valuation of the stock of direct investment in equity capital

11.7. In measuring the value of equity capital (including equity in branches), much of which is never traded or is traded infrequently, the following principles are applied:

      • for listed enterprises, the market value of the equity positions should be reported using a recent transaction share price. If recent transaction prices are not available, the midpoint of the quoted buy and sell prices of the shares on their main stock exchange at the reference date specified provides a useful approximation; and
      • for unlisted enterprises, if a market value of the shares is not available the data reporter is asked to estimate the market value by one of the following methods (in descending order of preference): a recent transaction price; director’s valuation; or net asset value.

11.8. The net asset value of an enterprise is equal to total assets, including intangibles, less non-equity liabilities and less paid up value of non-voting shares. Ideally, assets and liabilities should be valued at the market value. If this is the case, the net asset value may be regarded as providing a good approximation of the market value. Even in such cases, the net asset value may still be less than a willing buyer would be prepared to pay for the equity, as the enterprise may have a higher perceived value as a going concern. Often, historical costs (as distinct from current values) are used by enterprises to value assets and liabilities on balance sheets. To the extent that assets are not revalued to reflect market values, the calculation of net asset value based on such balance sheets will have further deficiencies as a proxy for market value. However, Australian accounting standards require fairly frequent asset revaluations, particularly when valuations are likely to change significantly, and there is evidence indicating that reported valuations have improved progressively since the market value principle was first introduced into the statistics.

Valuation of the stock of portfolio investment

11.9. Survey reporters are asked to report market values at the reference date (the end of a quarter) when reporting portfolio investment. For equity securities the method of valuation is the same as in paragraph 11.7. For debt securities survey reporters are asked to report traded price at the date specified. If that value is not available, they are asked to report in order of preference one of the following methods: yield to maturity; discounted present value; face value less written value of discount; issue price plus amortisation of discount; or another mark to market basis. Where data models are used for measuring either the stock of portfolio investment in equity capital (shares) and debt securities issued in Australia and held by nominees, or debt securities issued abroad, or the transactions in these instruments, market values are used based on market prices recorded on Australian or foreign stock exchanges or appropriate stock indexes at the reference date. Again, when reporting the value of financial derivatives, survey reporters are asked to report market value.

Valuation of the stock of other instruments

11.10. Notes and coins, trade credits, loans and deposits are examples of instruments which cannot be readily transferred from one transactor to another. In principle, they are valued at market value; in the Survey of International Investment, survey reporters are asked to ‘use nominal (face) value as an approximation for market value, unless book values have been devalued'.

Valuation of the stock of official reserve assets

11.11. Official reserve assets consist of a number of instruments such as monetary gold, Special Drawing Rights, reserve position in the IMF, foreign currency notes and coins, foreign currency deposits, bonds and notes, money market instruments, financial derivatives and other claims. Monetary gold is valued at the current market price of commodity gold, debt securities and derivatives are valued at market value as described in the previous paragraphs, Special Drawing Rights are valued at an administrative rate determined by the IMF. The reserve position in the IMF is valued at a rate which reflects the current market value of the currency that can be accessed (under certain conditions) or of the loans outstanding by the IMF to the creditor. Other instruments are valued according to the principles, appropriate to the instrument, described above.





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