Transcript Other Services - Pacific Financial Technical Assistance Centre

Services Account (II)
Other Services
Course on Balance of Payments and
International Investment Position Manual
(BPM6)
IMF-PFTAC
Nadi
November 22-December 1, 2010
BP19
Overview of Part II
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Construction
Insurance and pension services
Financial services
Charges for the use of intellectual property
Telecommunications, computer, and
information services
Other business services
Personal, cultural, and recreational services
1
Government goods and services n.i.e.
Construction
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Comprises work performed on construction projects by an
enterprise or site office that is nonresident in the host
country
Generally the work is of a short-term nature (note the oneyear guideline for residence). No special treatment is adopted
for the residence of short-term workers
The value of the construction service should equal the full
value of the construction project
Transfer of ownership may be deemed to occur in stages as
value is put in place – stage payments maybe in advance or
arrears (=>trade advances or credits)
21
Construction: Recording of related goods and
services (2)
Recording of related goods and services pertaining to
construction (viewpoint: construction abroad):
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Acquisitions of goods and services by the enterprises undertaking the
construction work from the economy of location (“host country”) =
construction debits
Goods and services brought from the home economy for use in the
construction project = credits (resident to resident)
Goods and services acquired from third countries for the project are
included in general merchandise/ and in = construction debits
22
Construction: Delineation between construction
and FDI (3)
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Determine the residency of the enterprise engaged in the construction
project:
If external operations of a construction enterprise are substantial enough that
are managed through a site office, a branch may be identified as an
institutional unit in the host economy
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separate set of accounts (incl. a balance sheet)?
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production of significant scale managed through a local site office other
than the head office “for one year or more”?
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purchasing/renting business premises, recruiting local staff, operating a
bank account?
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subject to income taxes (even if exempted)?, and other legal
requirements
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criteria of “intention” is also relevant, when a project is ex ante planned
which implies criteria of the branch will be met
If a branch is constituted in the economy of operation, goods and services
supplied between the branch and the parent are recorded as imports in
general merchandise with the counter-entry in direct investment liabilities;
and supplies from third countries as debit entry in goods/services
23
Construction: example (4)
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Example of the measurement of construction:
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Enterprise A, resident of A, provides construction services in B, with a total
value of $10,000.
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Which consists of:
Goods and services, and labor purchased in A:
Goods
$645
Services
$120
Labor
$435
Goods and services, and labor purchased in B:
Imported from A
$525
Imported from C
$1,750
Sourced in B
$2,290
Labor
$2,110
Goods imported from C
$500
Total cost of purchased inputs
$8,375
Gross operating surplus accruing to A
$1,625
Gross value of construction services
$10,000
24
Construction: example (5)
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Example of the measurement of construction:
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Enterprise A, resident of A, provides construction services in B, with a total
value of $10,000.
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Entries in A’s BOP statement:
Credit
Goods
Services
$500 (import from C)
$5,435(net)
$10,000
Income
$4,565
$2,110
Net acquisition of assets
Financial account
currency and deposits
Debit
(-$500)+(-$2,110)+(-$4,565)
+$10,000
Net incurrence of liabilities
25
Construction: example (6)
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Construction abroad comprises:
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Construction work for nonresidents by enterprises resident in the
compiling economy (credits), and
The goods and services acquired from the host economy (debit)
Construction in the compiling economy comprises:
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Construction work for residents of the compiling economy by
nonresident enterprises (debit), and
The goods and services acquired in the compiling economy from
resident enterprises by the nonresident construction enterprises (credit)
25
Financial Services (1)
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Included are services provided by financial intermediaries
and auxiliaries (except those of insurance and pension funds)
usually provided by banks and other financial corporations
these services may be charged
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by explicit charges
as margins on buying/selling transactions
as deductibles from property income for asset-management costs
indirectly, as FISIM
2
Financial Services (2)
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Deposit taking and lending
Letters of credit
Credit card services
Commissions and charges relating to financial leasing, factoring,
underwriting and clearing of payments
Financial advisory services
Custody of financial assets or bullion
Financial asset management
Monitoring services
Merger and acquisition services
Credit rating services
Stock exchange services
Trust services
3
Financial Services (3)
i)
Explicit charges, thus no special calculation
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loan application fees, commissions and brokerage fees, account
charges, etc.
early/late repayment fees (but excludes increase in interest rates
as a result of late payment)
financial market regulatory services
service charges on purchases of IMF resources
charges payable for arranging the provision of financial resources are
to be distinguished from amounts payable to the suppliers for the use
of these financial resources (=primary income)
3
Financial Services (4)
ii) Margins on buying and selling transactions
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Dealers, market-maker, foreign-exchange bureaus charge for their
services by providing foreign exchange, bonds, notes, financial
derivatives, etc. (BPM5 only included dealers in foreign exchange.)
not distinguishable from underlying financial transactions
estimated charge to
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Seller—difference between reference price and dealer’s buying price
Buyer—difference between reference price and dealer’s selling price
Reference price—usually mid-point price
some dealers may have their own internal price
the service can also be measured by applying the dealer’s average
margin as a percentage to the value of transactions through dealers
(Forex dealers often transact with one another
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In this case, there is no service charge)
4
Financial Services (5)
iii) Asset management costs deducted from property income
receivable
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some institutional units have the function of holding financial assets
on behalf of their owners
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e.g. mutual funds, investment funds, holding companies, trusts, SPEs, SWFs
for their administrative expenses to fund managers, banks, lawyers
or their staff, they charge explicitly
or take a part of the investment income received, or from the assets
of the enterprise
without recognizing these costs, the asset management enterprises
would have a negative operating surplus (=bankrupt)
5
Financial Services (6)
iii) Asset management costs deducted from property income
receivable
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the counter-entry is to increase the net investment income
receivable to the gross income, before deduction of the expenses
credit
Financial service charge
Income receivable
c+d
debit
2
10+2
10
6
Financial Services (7)
(iv) Financial Intermediation Services Indirectly Measured
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actual interest includes element of income as well as charge for service
by convention, only arises from loans and deposits
FISIM is calculated:
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for loans from financial corporations – difference between interest actually
payable and the amount payable if reference rate were used
for deposits – difference between the interest that would be earned if
reference rate were used and interest actually earned
“reference rate” represents pure cost of borrowing funds
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e.g. rate prevailing for interbank lending and borrowing
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should include no service component!
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should reflect risk and maturity structure of deposits and loans
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single rate for local currency transactions
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different rates for other currencies
7
FISIM: Example (8)
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Inter-bank interest rate 5% per annum.
Average value of loans during the year—1000
Actual interest receivable by the deposit-taking
corporations—70
partitioned into:
50 pure interest receivable (derived as 1000 at 5%)
20 FISIM receivable (derived as 70 - 50)
Average value of deposits during the year—500
Actual interest payable by the deposit-taking
corporations—10
partitioned into:
25 pure interest payable (derived as 500 at 5%)
15 FISIM receivable (derived as 25 – 10)
Total FISIM receivable by the deposit-taking
corporations—35 (20+15)
BPM5
credit
BPM6
debit
credit
FISIM
Income
Must be consistent with national accounts
debit
35
70
10
50
8
25
Charges for Use of Intellectual Property (1)
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Covers transactions included under “royalties and license
fees” in BPM5
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Includes:
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Charges for the use of (i) franchise and trademarks, like in BPM5;
and (ii) outcomes of R&D
But excludes:
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outright purchases/sales of franchises and trademarks are recorded in
the capital account
9
Charges for Use of Intellectual Property (2)
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Includes:
 (iii) Licenses to reproduce, or distribute intellectual
property embodied in
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Produced originals and prototypes (copyrights on books,
manuscripts)
Computer software
Audiovisual and related services (cinematographic works, and
sound recordings)
Related rights (for live performances)
But excludes:
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(i) Licenses to use software, and (ii) outright purchases/sales of
software (included in computer services)
Outright purchases/sales of results of R&D are recorded under R&D
services (in BPM5 in the capital account)
10
Charges for Use of Intellectual Property (3)
11
Charges for Use of Intellectual Property (4)
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Practical issues:
 Should follow accrual principle and charges should be
spread over period of use
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May include aspects of property income—property
income should be recorded separately
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In practice: may only be able to record when payments are made
In practice: may not be feasible
Charges may be called fees, commissions, royalties…
12
Telecommunications, computer, and information
services
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New grouping of various items previously classified
separately
defined in terms of the nature of the service, not the method
of delivery
Telecommunications
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Includes
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Broadcast or transmission by telephone, radio/television, email, etc.
Internet services
Business network services, teleconferencing, support services
(installation, etc)
Excludes
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value of the content being transmitted
installation services for networks and database services
19
Telecommunications, computer, and information
services (2)
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Computer Services
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Development and/or sale of customized software
Non-customized software, licenses to use non-customized software
(periodic fee) if electronically delivered
Hardware and software consultancy services, incl installation,
maintenance
Data hosting, processing, etc
Webpage hosting
Excludes
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Charges for licenses to reproduce or distribute software
Leasing of computers without an operator
Computer training courses not designed for a specific user
Non-customized packaged software = goods if on physical media
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Telecommunications, computer, and information
services (3)
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Information Services
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Includes
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News agency services (provision of news, photos, etc) to the
media
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Database services (design, storage, dissemination) through all
media (print, magnetic, optical, web search, etc)
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Direct nonbulk subscriptions to newspapers and periodicals by
any medium
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Library and archive services
Excludes
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bulk newspapers
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downloaded software
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Other Business Services (1)
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Includes
 R&D Services
 Professional and management consultancy services
 Technical, trade-related, and other business services
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R&D Services
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Includes: Outright purchases/sales of results of R&D (in BPM5
considered nonproduced and thus included in capital account) such as
patents, copyrights, and sale of information about industrial processes
Excludes: Charges for the use of the outcomes of R&D
13
Other Business Services (2)
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Professional and management services
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Legal services, accounting, management consulting, managerial services,
and public relations services; and
Advertising, market research, and public opinion polling services
Also: services for the general management of a branch, subsidiary, or
associate provided by a parent enterprise or other affiliated enterprise
Technical, trade related, and other business services
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Includes agricultural, engineering, waste treatment and depollution,
mining, operational leasing
Trade-related services cover commissions on goods and service
transactions payable to merchants, commodity brokers, dealers,
auctioneers, and commission agents.
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Does not include merchanting (now included under goods)
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Other Business Services (3)
Operational leasing
 Renting of produced assets (buildings, machinery,
equipment, etc.)
 covers leasing (rental) and charters, without crew, of
ships, aircraft, and transport equipment (railway cars,
containers, and rigs, without crew)
 Operating leases of dwellings and other buildings are
included in this item, if not included in travel
15
Other Business Services (4)
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An operating lease is distinguished from:
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a financial lease, where the risks and rewards of ownership of
the asset are transferred to the lessee; with an operating lease,
the lessor has the risks and benefits
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a resource lease, where the asset provided is a natural
resource, rather than a produced asset
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Rent—classified as primary income
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However! What happens if split between buildings and
land not possible?
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a lease included under contracts, leases, and licenses, where
the lease itself—rather than the underlying asset—becomes an
economic asset of the lessee.
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Personal, Cultural, and Recreational Services (1)
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Audiovisual and related services.
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services and associated fees related to the production of motion
pictures (film or videotape), radio and television programs (live or on
tape), and musical recordings
rentals of films, videotapes, etc.
fees received by actors, directors, producers, (if they are employees
of the entity making payments =compensation of employees)
charges for access to encrypted television channels (such as cable
and satellite services)
Excludes:
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mass-produced recordings and manuscripts on CD-ROM, disk, paper
are included in general merchandise
charges or licenses to reproduce or distribute radio, television, film,
music are included in charges for the use of intellectual property
n.i.e.
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Personal, Cultural, and Recreational Services (2)
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Other cultural and recreational services
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other types of services such as those associated with museums,
libraries, archives
other cultural, sporting and recreational activities
education services (such as the provision of correspondence courses)
health services (services provided in host economies)
gambling (consists of a service (incl. taxes) and a transfer element)
Excludes:
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Education and health services provided to nonresidents who are
present in the territory of the service provider are included in travel
Acquisition of other personal, cultural, and recreational services
(museums, gambling) by persons while outside their territory of
residence is included in travel
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Government goods and services n.i.e.
Residual category
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goods and services supplied by and to enclaves, such as embassies, military
bases, and international organizations
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goods and services acquired from the host economy by diplomats, consular
staff, and military personnel located abroad and their dependents
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e.g., office supplies, vehicles, repairs, rental of premises, electricity
e.g., also when embassy staff sells his car at the end of his stay abroad (debit of local
economy)
services supplied by and to governments and not included in other
categories of services
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Technical assistance on public administration, and when not classified to a specific
service,
payments for police-type services (such as keeping order)
issue of licenses to exercise some proper regulatory function (if not taxes)
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Insurance and pension services (1)
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Includes: Life insurance and annuities, nonlife insurance,
reinsurance, freight insurance, pensions, standardized
guarantees, auxiliary services
nonlife insurances
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are designed primarily to spread risks across all policyholders
typically, number of claimants much smaller than number of
policyholders; no relationship for individual policy-holder
between premiums paid (“price”) and claims received
pay claim only if an insured event occurs
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Insurance and pension services (2)
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life insurances
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policyholder makes regular payments in return for an agreed
sum, or an annuity, at a given date
form of saving
relationship between premiums and claims over time;
insurance company must combine saving aspect of a single
policy with actuarial calculations on insured population
when determining relationship between premium and benefit
(e.g. analysis of mortality, production of life-tables, etc)
redistribute income for a single policyholder across time
periods
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Insurance and pension services (3)
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reinsurance
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allows insurance risk to be transferred from one insurance provider to
another direct insurers become policy holders and may pass on the
entire risk / a proportion of risk / a risk above a given threshold (e.g.
due to a catastrophic loss)
undertaken by few companies and usually cross-border in nature!
freight insurance
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raises particular issues for the valuation of goods
provides coverage against theft, damage, and lost of freight
the FOB concept determines who pays the insurance, and whether it is
included in the price of the good (included in FOB price up to the border of
exporter; beyond exporters border, premiums are payable by importer)
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Insurance and pension services (4)
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Pension funds
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similar to insurance— providers act as intermediary for investing
funds and redistribute some risks
provide benefits for retirement or invalidity of specific groups of
employees
Standardized loan guarantee schemes
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common for student loans and export guarantees
issued in large numbers (usually for fairly small amounts)
may be issued by financial institutions or government
similar in nature to nonlife insurance
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not possible to establish likelihood of default on a specific loan
but possible and standard practice to estimate how many loans out of a
given batch would default
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Measurement of output /insurance services
For nonlife insurances (5)
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Transactions between insurer and policyholder include:
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insurance company accepts premium from a client
holds it until a claim is made, or insurance period expires
in the meantime, it invests the premium
the investment income is an extra source of funds to meet claims due
income is implicit supplement to actual premium, attributed to client
Insurance company sets level of actual premiums, so that
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Premiums earned + investment income earned on them – expected
claims
= margin that insurance company can retain
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represents what is available to enterprise to cover costs and
provide operating surplus
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Measurement of output /insurance services
For nonlife insurances (6)
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In order to “mimic” the premium setting policy of insurance
companies, and to avoid extremely volatile, or even negative output
of the insurance activity,…
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…we have to identify five separate items:
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premiums earned
premium supplements
expected claims
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claims payable
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adjusted for claims volatility
insurance technical reserves
Accrual principle.
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gross premiums paid vs. premiums earned (receivable)
claims paid vs. claims incurred (payable)
25
Measurement of output /insurance services
For nonlife insurances (7)
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gross premiums earned:
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proportion of actual premiums, relating to the accounting period in
question rather than to the period covered by the insurance policy
refers to those premiums payable that cover the risks incurred during
the accounting period
differ from premiums received, as they are usually paid in advance
Example:
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annual policy with a premium of 120 starts April 1, with the accounts being
prepared for the calendar year
premium earned is 90
unearned premium is 30, which is actual premium received for period past
the accounting period, i.e. prepayment for first 3 months of next year
credit extended by the policyholder to insurance company, i.e. unearned
premiums
26
Measurement of output /insurance services
For nonlife insurances (8)
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claims payable:
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claims for events that occurred during the accounting period, even
if payment is made some time later
Claims outstanding cover
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claims that have not been reported
have been reported but not yet settled
have been reported and settled but not yet paid
… and are recognized as due on an accrual basis, whether or not
paid, settled or reported.
claims payable include claims paid plus “reserves against claims
outstanding”
27
Measurement of output /insurance services
For nonlife insurances (9)
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adjustments for claims volatility:
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to reflect a longer term view of claims behavior
level of claims varies from year to year, with exceptional events causing
high level of claims
However, the concept of insurance service is the service of providing
cover against risk; production occurs continuously, and not just when
risk occurs!
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= difference between actual claims and a normally expected level of
claims
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volume / price of insurance services should not be affected by volatility of
claims
adjusted claims may be calculated by modeling past claims (= expectations
approach, ex-ante) , or from accounting information (ex post)
without adjustment, output could turn negative
for some types of nonlife insurance, limited volatility and no adjustments
necessary
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Measurement of output /insurance services
For nonlife insurances (10)
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reserves in insurance:
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Premiums are paid in advance
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since not all claims will be settled by the end of the financial year in which
they arise
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the part of the premium relating to the insurance period falling in the next financial
year has not been earned by the end of the current year, and must be transferred to
reserves at the end of the financial year
provisions must be made in the balance sheet for these outstanding claims or claims
likely to be incurred but not yet notified (= accrual accounting, estimates for claims
not yet reported are correctly included)
sum involved is at the disposal of the insurance company to invest and
earn income from it
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the income earned from it allows to charge lower premiums
29
Measurement of output /insurance services
For nonlife insurances (11)
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premium supplements:
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as part of the business of insurance companies, these reserves are
managed on the financial markets
the income generated by these investments have a considerable influence
on the level of premiums that these companies have to charge;
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they can give a “discount”, i.e. lower the premiums
consequently, the income earned is treated as being receivable by the
policyholders who are then treated as paying it back to the insurance
companies as premium supplements (=imputation)
30
Summary
For nonlife insurances (12)
Derived items for the BOP? (viewpoint: resident insurer)
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Goods and services account:
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insurance services= gross premiums receivable + premium supplements
- expected claims (actual claims payable plus adjustment for claim
volatility)
Primary income account:
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investment income attributable to policyholder (premium supplements)
Secondary income account:

net premiums receivable = gross premiums receivable + premium
supplements – insurance services
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claims payable
Financial account:
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insurance reserves, (increase in liability to insurances holder)
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(currency and deposits, i.e. premiums received; claims paid)
IIP:
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the stock of claims outstanding
31
Example
For nonlife insurances (13)
Resident insurers with separate data on policyholders abroad:
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Premiums earned from abroad_________100 (premiums received
105)
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Claims payable abroad________________140 (claims paid 130)
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Net increase in technical reserves relating to insurance with
nonresidents due to prepayment_______5
Net increase in technical reserves relating to insurance with
nonresidents due to claims incurred but not yet paid _______10
Income attributable to policyholders______5 (premium
supplements)
Adjustment for volatility in claims payable:______- 40
32
Example
For nonlife insurances (14)
Derived items for the BOP? (viewpoint: resident insurer)
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Goods and services account:
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insurance services= gross premiums receivable + premium supplements
- expected claims (actual claims payable plus adjustment for claim
volatility)
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expected long-term claims: claims payable – adjustment: 140 – 40 = 100
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100 + 5 – 100 = 5
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Primary income account:
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investment income attributable to policyholder (premium supplements)
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=5
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Secondary income account:
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net premiums receivable= gross premiums receivable + supplements –
insurance service
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100 + 5 – 5 = 100
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claims payable
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= 140
33
Example
For nonlife insurances (15)
Derived items for the BOP? (viewpoint: resident insurer)
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Financial account:
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insurance reserves, increase in liability to insurances holder
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5 + 10 = 15
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currency and deposits, decrease assets
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105 – 130 = - 25
34
More examples in BPM6, Appendix 6,
or SNA 2008
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Calculation of insurances with less
available information
Calculation of life insurance services
35