Appendix IV. Reconciliation Between the Guide’s Methodology and National and Commercial Accounting
- International Monetary Fund
- Published Date:
- April 2006
1. This appendix explains how the concepts outlined in Chapter 3 and the line-item series defined in Chapter 4 can be reconciled with similar concepts developed in the 1993 SNA (national accounts) and the IASs.1
2. The framework of national accounts in the 1993 SNA provides for the construction of a range of tables that begin with production, income, and accumulation accounts, as well as balance sheets showing the stock of financial and nonfinancial assets and liabilities for the financial, nonfinancial, household, and general government sectors of an economy. The full sequence of accounts is set out in pages 601–674 of the 1993 SNA.
3. For each group of assets and liabilities, and for net worth, changes between the opening and closing balance sheets that result from transactions and other flows are recorded in the so-called accumulation accounts. As explained below, many of the data series used in constructing FSIs for the other depository corporations (deposit takers in the terminology of the Guide), other financial corporations (OFC), nonfinancial corporations, and the household sector can be obtained from the national accounts framework or related frameworks such as monetary statistics. The derivation of FSI data series from the 1993 SNA framework are set out in Tables 11.9–11.11.
4. Business accounting is designed to assess the financial condition of individual productive units, measure their economic result, and determine interested parties’ (mainly the shareholders’ and tax authorities’) entitlement to that result. There is a focus on two concepts: solvency (the value of net assets (or equity) held by an entity) and profitability (a component of the value added by the entity during the reporting period).2 It relies on specific norms and standards (for example, as set out in IASs) to achieve its objectives with understandability, relevance, reliability, and comparability.3 The International Accounting Standards 2002 prepared by the IASB (IASB, 2002) are utilized in drafting this appendix.
5. At the time of writing, the IASs consist of 39 separate standards, numbered IAS 1 to IAS 41 (IAS 25 has been withdrawn and IAS 15 is no longer binding). The references below are to those standards and to the relevant paragraph numbers within the quoted standard. In contrast to the 1993 SNA, there is no standardized set of tables for the presentation of commercial accounts. Moreover, while financial statements prepared in accordance with IASs should, at a minimum, present line items in accordance with IAS 1, for banks and similar financial institutions there is a more detailed specific standard (IAS 30).
Income and Expense Account
Interest Income and Expense
6. In both the 1993 SNA and the IASs, it is recommended that interest accrue continuously on debt instruments, consistent with the approach in the Guide.
7. In the 1993 SNA, as in the Guide, interest accrues at the contractual rate of interest—the effective rate on issuance. In the Guide, lines 1(i) and 2 in Table 4.1, lines 4 and 5 in Table 4.3, and part of line 2 in Table 4.4 in principle correspond to the 1993 SNA’s full sequence of accounts to line D.41 in the Primary Income Account. Moreover, if FSIM4 are calculated for deposit takers, they correspond in part to line P.11 of the Production Account for deposit takers, in part to line P.2 of intermediate consumption in the Production Account for enterprises and in part to line P.31 of final consumption in the Use of Income Account for households.
8. In IASs, interest income is defined as one type of revenue (besides royalties and dividends) arising from the use by others of an enterprise’s financial assets (IASs 18.29–18.31) (also IASs 32.30–32.31) [IASs 32.35–32.36]. Interest income is recognized on an accrual basis over time, based on the effective yield on the asset, which is defined as the rate of interest required to discount the stream of future cash receipts expected over the life of the asset to equate to the initial carrying amount of the asset. Interest income includes the amount of amortization of any discount or premium arising from a difference between the issue price and the par value.5 If debt instruments are traded and market prices are established, then for creditors there is a difference of approach between the Guide and the IASs in that the effective rate of interest on acquisition may be different from that on issuance. The greater the variability of market prices, the more significant this difference could be.
9. For creditors, interest on nonperforming assets is treated differently in the 1993 SNA and in IASs. In the 1993 SNA, creditors (and debtors) should continue to accrue interest on nonperforming assets unless the asset is written off. In contrast, IAS 39.116 [IAS 39. AG.93] states that impaired assets should be written down to their estimated recoverable amount and creditors should base the calculation of interest income on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount.
10. In “Sound Practices for Loan Accounting and Disclosure,” the BCBS (1999) recommends in standard 11 that when a loan is identified as impaired, a bank should cease accruing interest in accordance with the terms of the contract. Interest on impaired loans should not contribute to net income if doubts exist concerning the collectability of loan interest or principal. However, in some countries, when impaired loans are carried at the present value of expected future cash flows, interest may accrue at the effective rate implicit in the present value calculation.
11. The Guide follows BCBS in that interest on nonperforming assets should not contribute to net interest income.
Fees and Commissions Receivable/Payable
12. In the 1993 SNA, fees and commissions receivable reflect the value of services provided (for deposit takers, 1993 SNA, paragraph 6.123). In the 1993 SNA’s full sequence of accounts, line 4(i) in Table 4.1 in principle corresponds to the fees and commissions included in line P.11 in the Production Account.
13. In IASs, financial fees and commissions are a form of revenue, and they are defined in IAS 18.20 and in its Appendix paragraph 14. The latter distinguishes fees that are an integral part of the effective yield of an instrument from those that are earned on services provided (such as for servicing a loan) and from those that are earned on the execution of a significant act (such as commission on the allotment of shares to a client). Fees that are an integral part of the effective yield of a financial instrument—and hence affect the rate at which interest accrues—include commitment fees to originate or purchase a loan where it is probable that the enterprise will enter into a specific lending arrangement, and origination fees relating to the creation or acquisition of a financial instrument that is held by the enterprise as an investment. Such fees are regarded as an integral part of generating an ongoing involvement with the financial instrument, and as such are deferred and recognized as an adjustment to the effective yield. The Guide differs from IASs in that it does not adjust the effective yield of an instrument for these fees but prefers to record them under fees and commissions.
Gains/Losses on Financial Instruments (Including Foreign Exchange)
14. In contrast to what appears in the Guide, in the 1993 SNA trading gains or losses do not appear in the distribution and use of income accounts. In the 1993 SNA full sequence of accounts, such trading gains and losses in principle correspond within the Revaluation Account to lines AF.2 (currency and deposits—partial coverage of foreign currency gains and losses), AF.3 (securities other than shares), AF.5 (shares and other equity—excluding equity investments in associates and subsidiaries), and AF.7 (financial derivatives; see IMF, 2000b). Holding gains and losses in the 1993 SNA include changes in the value of financial assets and liabilities due to changes in market prices and exchange rate movements. The change in value is measured as the difference in the unit of account between the value of an asset or liability at the end of the accounting period and its value at the start of the accounting period. Moreover, if the instruments were acquired during the period, the value at which they were first entered in the balance sheet is to be used. If they were sold during the period, their value at the start of the accounting period would have to be used. If, however, they were purchased during the period and sold during the period, then the value when they were purchased should be used. Thus, within an accounting period, the 1993 SNA concept of holding gains/losses encompasses both realized and unrealized gains/losses. As line 4(ii) in Table 4.1 excludes some, and line 6 in Table 4.3 excludes all, unrealized gains and losses, additional data would need to be requested to extract the required information from the 1993 SNA data. Line 6 in Table 4.3 includes the equivalent to the foreign exchange component of line AF in the Revaluation Account.
15. For banks and similar financial institutions, IAS 30.15 states that gains and losses from the following items are normally reported on a net basis: (1) disposals and changes in the carrying amount of dealing securities, (2) disposals of investment securities, and (3) dealings in foreign exchange. These items are consistent with the Guide (although, unlike the Guide, IAS 30.15 makes no reference to financial derivative instruments). Moreover, IASs 39.103–39.107 [IASs 39.55–39.57] state that a gain or loss on a financial asset or liability classified as at fair value that is not part of a hedging relationship should be included in net profit or loss; a gain or loss on an available-for-sale financial asset can be treated similarly, or it can be recognized in equity through the statement of changes in equity until the financial asset is sold, collected, or otherwise disposed of, or until it is determined to be impaired, at which point the cumulative gain or loss should be included in net profit and loss for the period. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in net profit or loss when the financial asset or liability is derecognized or impaired [IAS 39.56]. The IASs 39.121–39.165 [IASs 39.85–39.102] provide separate guidance for hedging instruments. Clearly, while the different treatment in IASs of gains and losses according to the purpose for holding the instrument differs from the approach in the Guide, within the IASs the treatment of instruments held for trading and one of the alternative treatments for available-for-sale financial assets are in line with the Guide’s recommendations.
16. IAS 21.15 explains the treatment of foreign exchange differences related to “monetary items,” which are in turn defined as money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. It states that foreign exchange differences arising from the settlement of monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements should be recognized as income or expenses in the period in which they arise, with two exceptions.
17. The first exception, set out in IAS 21.17, covers exchange-rate-related changes in the value of a monetary item that in substance forms part of an enterprise’s net investment in a foreign entity. Such differences should be classified as part of equity in the enterprise’s financial statements until the disposal of the net investment, at which time they should be recognized as income or expenses (depending on whether the cumulative amount of the exchange-rate-related differences that have been deferred and that relate to the foreign entity reflects a gain or a loss [IAS 21.37]).
18. The second exception, set out in IAS 21.19, covers exchange-rate-related changes in the value of a foreign currency liability accounted for as a hedge of an enterprise’s net investment in a foreign entity. Such differences should also be classified as part of equity in the enterprise’s financial statements until the disposal of the net investment, at which time they should be recognized as income or expenses (depending on whether the cumulative amount of the exchange-rate-related differences that have been deferred and that relate to the foreign entity reflects a gain or a loss [IAS 21.37]).
19. Both of these exceptions are consistent with the Guide’s approach of excluding gains and losses on those foreign exchange instruments related to equity holdings in subsidiaries, although the Guide does not recommend inclusion of gains and losses of earlier periods in present period earnings, when these instruments are disposed of.
Rent, Rental, and Royalty Income Receivable
20. In the 1993 SNA, as in this Guide, this item covers income from rents on land or subsoil assets; rentals from buildings, other structures, and equipment; and royalty income from other produced and nonproduced assets. Therefore, part of line 4(iv) in Table 4.1, line 6 in Table 4.3, and part of line 2 in Table 4.4 of the Guide in principle most closely correspond to line D.45 in the Allocation of Primary Income Account (rents) and line P.11 in the Production Account (rental and royalty income—classified as services)6 in the 1993 SNA. In concept, line D.45 covers only rent on land and subsoil, but the 1993 SNA does acknowledge (paragraph 7.131) that in practice a single payment may cover rent on land and rentals on buildings. If a split can be made, rentals receivable should be classified as a provision of services (line P.11 in the Production Account). There is no specific standard for rent in IASs except insofar as it is mentioned generally in the IASB Framework, paragraph 74, that rent is part of the revenues of an enterprise. In accordance with IAS 40.66 (d)(i), rental income from investment property should be included in the income statement.
Prorated Share of Income from Associates and Subsidiaries
21. For foreign affiliates, the reinvested earnings element within the “prorated earnings” line (4(iii) in Table 4.1 and line 6 in Table 4.3) of the Guide correspond to line D.43 in the 1993 SNA. There is no equivalent concept for resident affiliates. The dividends element of the prorated share of income is covered below.
22. In IAS 28.3, under accounting by the equity method, the income statement reflects the investor’s share of the results of the operations of the investee. This is applicable to associates, the subject of IAS 28, and is one of the three approaches that can be adopted for unconsolidated subsidiaries (IAS 27.30). IASs permit the use of the equity method for jointly controlled ventures, if the assets and liabilities of the joint venture are not proportionately consolidated with the venturer’s financial statement (IASs 31.32–31.34).
23. The standard in the Guide is the same as in the 1993 SNA and in IAS 18.30 in recommending that property income to be distributed to shareholders in the entity be recognized as income when the shareholder’s right to receive payment is established. Dividends within the “other income” line (4(iv) in Table 4.1; line 6 in Table 4.3) and dividends within “property income receivable” (line 2 in Table 4.4) of the Guide in principle correspond to lines D.421 and D.422 (resources) in the Allocation of Primary Income Account in the 1993 SNA’s full sequence of accounts. Dividends paid or payable in Table 4.1 (line 12) and in Table 4.3 (line 11) also correspond to D.421 and D.422 (uses).
Net Gains/Losses from Sales of Fixed Assets
24. In the 1993 SNA, net gains or losses from the sale of fixed assets are defined as the change in the value of fixed assets due to changes in their market price. These gains and losses are included in line AN.11 (holding gains and losses in respect of fixed assets) in the Revaluation Account in the 1993 SNA’s full sequence of accounts. The change in price is measured as the difference between the value of the fixed asset at the end of the accounting period and its value at the start of the accounting period or, if acquired during the period, its value on the date on which it was first entered in the balance sheet. This 1993 SNA concept thus encompasses both realized and unrealized gains/losses. Since net gains/losses on fixed assets within line 4(iv) in Table 4.1 and line 6 in Table 4.3 of the Guide cover only realized gains during the period, additional data would need to be requested to extract the required information from the 1993 SNA data.
25. IAS 16.56 states that gains or losses “from the retirement or disposal of an item of property, plant, and equipment should be determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and should be recognized as income or expense in the income statement.” This concept is the same as in the Guide, although the Guide recommends market valuation of fixed assets, while IAS 16 favors valuation on the basis of historic value. IAS 40 permits enterprises to use either the model in IAS 16 or a fair value model for investment property (but not for owner-occupied property). Under IAS 40, if an enterprise chooses the fair value model, all changes in fair value should be recognized in the income statement (IAS 40.28).
26. In the 1993 SNA, miscellaneous current transfers, such as compensation payments received, are included in D.75. IAS 8.18 covers income from litigation settlements.
Personnel Costs Including Wages and Salaries
27. The concept of personnel costs (line 6(i) of Table 4.1 and implicit in line 2 of Table 4.3) in the Guide corresponds in the 1993 SNA’s full sequence of accounts to D.1, Compensation of Employees in the Generation of Income Account, and D.623, Unfunded Employee Social Insurance Benefits in the Secondary Distribution of Income Account. Wages and salaries from employment (line 1 in Table 4.4) correspond to line D.11. In the 1993 SNA (paragraphs 7.21 to 7.47), compensation of employees is defined as the total remuneration, in cash or in kind, payable by an employer to an employee in return for work done during the accounting period. Included is remuneration payable to workers away from work for short periods. Compensation of employees can be broken down into the following: (1) wages and salaries in cash and in kind, and (2) employers’ social contributions, actual and imputed, for such items as postemployment benefits.
28. The 1993 SNA does not explicitly cover compensation in the form of options to buy the shares of the entity at some future time at an agreed price (stock options).
29. IAS 19.4 has a similar concept to the 1993 SNA, defining employee benefits as including the following:
Short-term employee benefits, such as wages and salaries and social security contributions. These benefits cover paid annual leave and paid sick leave, profit sharing and bonuses, and nonmonetary benefits (such as medical care, housing, cars, and free or subsidized goods or services).
Postemployment benefits, such as pensions, other retirement benefits, postemployment life insurance, and postemployment medical care.
Other long-term employee benefits, including long service leave or sabbatical leave, and long-term disability benefits.
Equity compensation benefits, including stock options (although no guidance is provided on recognition or measurement).
30. The first bullet above is close to the concept of wages and salaries in cash and in kind in the 1993 SNA, except for social security contributions, which are included in employers’ social contributions in the 1993 SNA.
31. Depreciation within line 6(ii) of Table 4.1 and line 2 of Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to line K.1 (consumption of fixed capital (CFC)). CFC is defined (paragraphs 6.179–6.180) as the amount of fixed assets consumed during the period under consideration as a result of normal wear and tear and foreseeable obsolescence. CFC should be estimated on the basis of the stock of fixed assets, valued at purchasers’ prices as of the current period, and the probable average economic life of the different categories of assets. CFC can be calculated according to the straight-line method by which the value of a fixed asset is written off at a constant rate over the whole lifetime of the asset or, depending on the pattern of decline in the efficiency of a fixed asset, according to a geometric depreciation method (1993 SNA, paragraphs 6.193–6.197).
32. IASs 16.41–16.48 describe a similar treatment for depreciation. They state that the depreciable amount of an item of property, plant, and equipment should be allocated on a systematic basis over its useful life. The depreciation method used should reflect the pattern in which the asset’s economic value is consumed by the enterprise. These methods could include the straight-line method, the diminishing-balance method, and the sum-of-the-units method. Straight-line depreciation, as noted above, results in a constant charge over the useful life of the asset. The diminishing-balance method results in a decreasing charge over the useful life of the asset. The sum-of-the-units method results in a charge based on the expected output of the asset. IAS 16.43 states that the useful life of a depreciable asset should be estimated after considering (1) the expected physical wear and tear, (2) obsolescence, (3) legal or other limits on the use of the asset, and (4) expected usage by the enterprise.
33. The main difference between CFC and the IASs’ treatment of depreciation is in the valuation of the fixed assets, which is required to be the current purchasers’ prices for CFC but tends to be at historical cost under IASs. CFC should also be distinguished from business accounting of depreciation for tax purposes. However, IASs also state that the depreciation method should be reviewed periodically and, if there has been significant change in the expected pattern of economic benefits, there should be a change in the depreciation charge for the current and future periods (IAS 16.52), which may narrow the difference between CFC and IASs valuations.
34. Losses due to unforeseen obsolescence, such as through the introduction of new technology or unforeseen damage (other than events covered under extraordinary items), are recorded as depreciation. This is consistent with IAS 16.50, and such losses correspond to K.9 in the 1993 SNA (excluding exceptional losses in inventories, which like depreciation is covered in the line cost of sales in Table 4.3).
Other Noninterest Expenses (Such as Plant and Equipment Expenses Including Rentals, Advertising Costs, and Premiums Paid for Deposit Insurance)
35. These expenses are related to the ordinary operations of the entity other than those identified elsewhere in this appendix. The ongoing expenses of operating an enterprise, covered within line 6(ii) in Table 4.1 and line 2 in Table 4.3 of the Guide, correspond in the 1993 SNA’s full sequence of accounts to line P.2 (intermediate consumption), together with D.71 (net nonlife insurance premiums) and D.75 (miscellaneous current transfers). However, unlike the Guide, the series in the 1993 SNA do not include estimated costs related to product warranties.
36. In the IASB Framework paragraphs 70 and 78–80, expenses are defined to encompass those that arise in the course of the ordinary activities of the enterprise, although they are not defined in detail. Expenses arising from product warranties are described in IASB Framework paragraph 98 and more fully in IAS 37.24. In principle, the IAS approach is consistent with the approach taken in the Guide for these expenses. IAS 8.18 covers expenses arising from litigation settlements.
37. Rentals payable on buildings, other structures, and equipment are included under this item, along with rents paid on land and subsoil assets, and royalties payable on the use of other produced and non-produced assets. Receipts for rents, rental, and royalty income were discussed earlier, in a separate section in this appendix.
Taxes Other Than Income Taxes
38. Taxes included in line 6(ii) of Table 4.1 and line 2 in Table 4.3 of the Guide correspond in the 1993 SNA’s full sequence of accounts to line D.29 (taxes on production) and line D.59 (other current taxes). These taxes are compulsory, unrequited payments in cash and in kind levied in respect of the production (such as taxes on payroll or the workforce), as well as on the ownership or use of land or buildings and on other assets and net wealth (described in paragraphs 7.70 and 8.53–8.54 of the 1993 SNA).
39. The IASs have no specific definitions for taxes that are not levied on income.
40. Operating subsidies from general government included in line 6(ii) of Table 4.1 of the Guide correspond in the 1993 SNA’s full sequence of accounts to subsidies on production (line D.39). IAS 20.29 explains that government grants related to income could be presented as a credit in the income statement or deducted in reporting of the related expenses. The IAS regards either method as acceptable. These grants are defined in IAS 20.3 as assistance by government in the form of a transfer of resources.
Loan Loss Provisions
41. The 1993 SNA does not have a concept of provisions for loan losses. However, the writing off of bad debts by creditors (K.10) provides some coverage of loan losses (and losses on other claims). The distinctions made in the Guide for loan loss provisions follow the IASs. The Guide, however, relies on national practice in identifying provisions.
42. IAS 30.45 states that for banks, provisions for specific loans (specific provisions—that is, losses that have been specifically identified) and provisions for losses not specifically identified (general provisions—which experience indicates are present in the portfolio of loans and advances) should both be recognized as expenses. Under IAS 30.51, local circumstances or legislation may require or allow a bank to set aside amounts for general banking risks, including future losses or other unforeseeable risks. However, such amounts set aside should be accounted for as appropriations of retained earnings and not expenses in determining net profit or loss for the period. A bank may also be required or allowed to set aside amounts for contingencies (IAS 37). Such amounts also do not qualify for recognition as provisions but should be recognized as appropriations of retained earnings (IAS 30.51) so as not to distort net income and equity.
Other Financial Assets Provisions
43. As with loans, the 1993 SNA does not address the concept of provisions for securities or other financial assets.7 IASs discuss provisions for losses on financial assets in IASs 39.109–39.111 [IASs 30.43–30.49, 39.58–39.70, and 39. IG. E.4], where it is stated that when the carrying amount of the impaired asset is greater than its recoverable amount—estimated by discounting the expected future cash flows using the financial instrument’s original effective interest rate—the carrying amount of the asset should be reduced to its estimated recoverable amount either directly or through use of an allowance account, with the loss included in net profit or loss for the period. This concept is not identical to the Guide’s recommendation that the market value of investment securities be recorded on the balance sheet. If the securities are not recorded at market value, provisions for securities may be greater or smaller than the change in the market value, depending on the deposit takers’ views on recoverable amounts on the securities.
Bad Debt Recoveries
44. The IASs recommend that if there is an improvement in the standing of a debtor so that the amount of impairment or bad debt loss decreases, such a reversal should be included in net profits or loss for the period.8 One approach would be to make adjustments to an Allowance Account. This approach is consistent with that for line 7 of Table 4.1 of the Guide, which allows for provisions to be reduced if there was an overprediction of expected losses in an earlier period.
45. The extraordinary items in line 9 in Table 4.1 and line 8 in Table 4.3 of the Guide correspond in the 1993 SNA’s full sequence of accounts to line K.7 (catastrophic losses) and line K.8 (uncompensated seizures). The IAS 8.6 defines an extraordinary item as an event or transaction that is clearly distinct from the ordinary activities of an enterprise and is unlikely to recur frequently or regularly. The IAS 1.75 requires the separate disclosure of extraordinary items in the income statement for the period. Such items are determined by the nature of the event or transaction in relation to the business ordinarily carried out by the enterprise rather than by the frequency with which such events are expected to occur. For example, losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises but not for insurance enterprises that insure against such risks. The IASs suggest that extraordinary items for most enterprises include an earthquake or other natural disaster and the expropriation of assets (IASs 8.11–8.15). The concept in the Guide is consistent with that in the IASs.
Income Tax Expense
46. Income tax expense, line 10 in Table 4.1 and line 9 in Table 4.3, corresponds in the 1993 SNA’s full sequence of accounts to line D.51. Consistent with the Guide, the 1993 SNA defines these taxes as those assessed on the incomes, profits, and capital gains of individuals, households, corporations, and nonprofit institutions (paragraph 8.52). IAS 12.2 states that “income taxes include all domestic and foreign taxes which are based on taxable profits.”
Revenues from Sales of Goods and Services (Nonfinancial Corporations)
47. Line 1 in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to line P.11 (market output for nonfinancial corporations), which in turn equals line P.1 (gross output) less line P.12 (output for own use) less the value of changes in the inventories of goods produced as outputs (finished goods element of line P.52). However, as noted in the 1993 SNA (paragraph 6.43), under normal circumstances the available data are accounting data on sales, and thus the national accountant is required to adjust sales for changes in inventories to arrive at the data for production. Moreover, in the 1993 SNA, the system for recording transactions by retailers and wholesalers is not to record purchases of goods for resale but rather to measure the margin on goods purchased for resale (paragraph 3.30).
48. IASs 18.14 and 18.20 recognize the sale of goods when an enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods and the amount of revenue can be reliably estimated. They also recognize the rendering of services when the amount of revenue can be reliably estimated and the stage of completion of the transaction at the balance sheet date can be measured reliably. This is consistent with the change-of-ownership concept in the Guide.
Current Transfers (Households)
49. Line 3 in Table 4.4 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to lines D.62 (social benefits) and D.7 (other current transfers) in the Secondary Distribution of Income Account. Social benefits include pensions and unemployment benefits (1993 SNA, 8.75–8.83) and other current transfers (1993 SNA, 8.84). The concept in the Guide is the same as in the 1993 SNA. IASs do not have a specific definition of current transfers.
Other Income (Households)
50. Line 4 in Table 4.4 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to lines B.2 (operating surplus) and B.3 (mixed income) in the Generation of Income Account for households.
Taxes, Social Contributions, and Other Current Transfers Made (Households)
51. Line 5 in Table 4.4 of the Guide includes social security taxes. In the 1993 SNA’s full sequence of accounts, these taxes correspond to lines D.6112 and D.6113 (social contributions). IAS 12 defines income tax expense, but IASs do not have a specific definition for social security taxes. (Income taxes were discussed in a separate section, above.) Other current transfers made corresponds in the 1993 SNA’s full sequence of accounts to line D.7 (uses) and to line D.62 (social benefits other than social benefits in kind). As these transfers relate to households, they are not covered in the IASs.
Gross Disposable Income (Households)
52. The concept in the Guide is intended to correspond in the 1993 SNA’s full sequence of accounts to line B.6 in the Secondary Distribution of Income Account (gross of any consumption of fixed capital).
Assets, Liabilities, and Net Worth
53. In the 1993 SNA, economic assets are stores of value over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits9 may be derived by their owners by holding or using them over a period of time. In the 1993 SNA, financial assets differ from other assets in that there is nearly always a counterpart liability on the part of another institutional unit.10 Assets and counterpart liabilities that meet the definition are recognized on balance sheet.
54. In terms of specific assets and liabilities identified, the Guide is very close to the 1993 SNA, differing only in the presentation of capital. The concept of capital and reserves in the Guide is the residual after taking account of all assets and liabilities, and thus is a wider concept than equity and other shares in the 1993 SNA, as it also includes the 1993 SNA’s concept of net worth (total assets less total liabilities).
55. IASB Framework, paragraph 49 defines an asset as a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. It defines a liability as a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. The definition of financial assets and liabilities in IAS 32.5 [IAS 32.11] provides an overview of the categorization of financial assets and liabilities. Financial assets comprise (1) cash; (2) a contractual right to receive cash or other financial instruments from another enterprise, or to exchange financial instruments with another enterprise under conditions that are potentially favorable; (3) a contract that may be settled in the entity’s own equity instruments; and (4) an equity instrument of another enterprise. Financial liabilities comprise contractual obligations (1) to deliver cash or another financial asset to another enterprise or (2) to exchange financial instruments with another enterprise under conditions that are potentially unfavorable. Equity is defined as the residual interest in the assets of the enterprise after deducting all of its liabilities.
56. There are potential differences between the Guide and the IASs as to what is deemed to be an asset or a liability. For example, unlike the Guide, IASs consider that unpatented know-how may meet the definition of an asset if, by keeping such knowledge secret, the enterprise controls the benefits that are expected to flow from it (IASB Framework, paragraph 57). Similarly, if an enterprise as a matter of policy rectifies products after the warranty period has expired, the expected costs are liabilities (IASB Framework, paragraph 60). However, under IASs, on-balance-sheet recognition also depends on whether the value of the asset or liability can be measured reliably (IASB Framework, paragraphs 89 and 91). This requirement for reliable valuation brings the IASs definitions of on-balance-sheet recognition of assets and liabilities close to the Guide’s.
57. In the IASs, the presentation of assets and liabilities is less prescriptive and more dependent on the activity of the individual enterprise than in the Guide, and it is different from that in the 1993 SNA. Moreover, the IASs’ presentation of instruments varies between the asset and liability sides of the balance sheet, and the focus is more on the liquidity of the enterprise, which differs from the emphasis in the Guide and in the 1993 SNA.
58. Line 15 in Table 4.1, line 2 in Table 4.2, line 14 in Table 4.3, and line 8 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to nonfinancial assets (AN) in the balance sheet (excluding purchased goodwill, which is part of AN.22).
59. These lines from the Guide are closely equivalent to the sum of items identified in IAS 1.66 as (1) property, plant, and equipment; (2) inventories; and (3) intangible assets.
60. The definition of nonfinancial produced assets adopted in the Guide is in line with that in IAS 16.6, which defines property, plant, and equipment to include tangible assets that (1) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administration purposes; and (2) are expected to be used during more than one period. Excluded from the scope of the IASs are (1) forests and similar regenerative natural resources, which are only classified as an asset in the Guide if they are cultivated assets; and (2) mineral rights, the exploration for and the extraction of minerals, oil, natural gas, and similar nonregenerative resources (IAS 16.2), because these activities are so specialized that they give rise to accounting issues that may need to be dealt with in different ways (IAS 38.6).
61. Inventories in the Guide are defined consistently with IAS 2, where they include assets that are (1) held for sale in the ordinary course of business, (2) in the process of production for such sale, or (3) in the form of materials or supplies to be consumed in the production process or in the rendering of services (IAS 2.4).
62. Intangibles are defined in IAS 38 as identifiable nonmonetary assets without physical substance held for use in the production or supply of goods or services for rental to others or for administrative purposes (IAS 38.7). This definition is broadly consistent with the one used in the Guide but, as noted above, could be interpreted more widely to include “assets,” such as unpatented know-how, when the value of the benefits arising from these “assets” can be reliably measured. Intangibles do not include goodwill (IAS 38.10), which is recognized as an asset in IASs when the cost of acquisition exceeds the acquirer’s interest in the fair value of the assets and liabilities acquired as of the date of transaction (IAS 22.41). The Guide does not recognize goodwill as an asset.
Nonfinancial Produced Assets
63. Line 15 in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to nonfinancial produced assets (AN.1) in the balance sheet. This line also corresponds to the sum of items identified in IAS 1.66 as property, plant, and equipment that is produced (that is, excluding land (IAS 2)), such as inventories (IAS 16) and that part of intangible assets (IAS 38) that is produced, such as computer software and valuables.
Nonfinancial Produced Fixed Assets
64. Line 15(i) in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to nonfinancial produced fixed assets (AN.11) in the balance sheet.
65. In the IASs, produced fixed assets are recorded under item (a) identified in IAS 1.66 as property, plant, and equipment that is produced (that is, excluding land), as well as that part of item (b) intangible assets that are produced, such as computer software.
66. Line 15(ii) in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to inventories (AN.12). In the IASs, this line corresponds to the item (e) identified in IAS 2, paragraph 4 as inventories in the balance sheet.
Nonfinancial Nonproduced Assets
67. Line 16 in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to nonfinancial nonproduced assets (AN.2) in the balance sheet. In the IASs, this line closely corresponds to that nonproduced part of the item (a) identified in IAS 1.66 as property, plant, and equipment—that is, land—and intangible assets that are nonproduced, such as goodwill, patents, leases, and other transferable contracts relating to nonfinancial assets (IAS 38). In the IASs, the value of nonpatented know-how can also be included, if it can be measured reliably.
Residential and Commercial Real Estate
68. Residential and commercial real estate, which is reflected in line 9 in Table 4.4 of the Guide, is not explicitly identified either in the 1993 SNA or in the IASs. Nonetheless, in the 1993 SNA, dwellings and other buildings and structures are described in paragraphs 10.69–10.71 and included within nonfinancial produced assets (AN.1), while land is described in paragraphs 10.59 and 10.60 and included within nonfinancial nonproduced assets (AN.2) in the balance sheet. In the IASs, real estate is included within the item (a) identified in IAS 1.66 as property, plant, and equipment (IAS 16.35).
69. Line 16 in Table 4.1, line 3 in Table 4.2, line 17 in Table 4.3, and line 11 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to financial assets (AF) in the balance sheet.11
70. In the IASs, there is a need to distinguish between deposit takers and other corporate entities. For deposit takers, IAS 30 sets out the assets that should be separately disclosed in their financial statements. These include cash and balances with the central bank; treasury bills and other bills eligible for rediscounting with the central bank; government and other securities held for dealing purposes; placements with, and loans and advances to, other banks; other money market placements; loans and advances to customers; government and other securities held for dealing purposes; and investment securities (IAS 30.19). IASs are clear that financial statements should include, but not be limited to, these items. For instance, in the list of instruments in IAS 30 no reference is made to financial derivatives, which under IAS 39 should be recognized on balance sheet at fair value (IASs 39.10 and 39.27) [IAS 39.9], except for derivatives that are designated and effective hedging instruments. Moreover, in some instances IAS 1 is relevant for the presentation of the accounts of deposit takers, such as in the case of tax assets (see immediately below). With these exceptions, although presented differently, the definition of the items and the coverage of financial assets in the IASs are close to the Guide.
71. With regard to nonbank entities, IAS 1.66 presets assets on a liquidity basis, in the same manner as for deposit takers. While IASs do not prescribe the order or format in which items are to be presented, these standards do regard each of the items presented as sufficiently different in nature or function so as to deserve separate presentation on the balance sheet, along with subtotals necessary to present fairly the enterprise’s financial position. The coverage of assets is again close to that of the Guide, but the classification and definition of items used are quite different. The financial assets identified by IAS 1.66 are item (g) cash and cash equivalents—cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to cash and that are subject to an insignificant risk of change in value (IAS 7.6); item (f) trade and other receivables—assets created by the entity providing money, goods, or services directly to a debtor; item (d) investments accounted for using the equity method—investments in associates (IAS 28) and unconsolidated subsidiaries (IAS 27.30); related tax assets (IAS 12.5), which are not considered assets in the Guide except to the extent that taxes have been overpaid and a refund is owed; and item (c) other financial assets, which include securities.
72. Line 23 in Table 4.1, line 11 in Table 4.2, line 24 in Table 4.3, and line 17 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to liabilities (AF) in the balance sheet.
73. As with assets, in the IASs it is necessary to distinguish deposit takers from other corporate entities. IAS 30.19 sets out the liabilities that should be reported by deposit takers in their financial statements as follows: (1) deposits from other banks, (2) other money market deposits, (3) amounts owed to other depositors, (4) certificates of deposit, (5) promissory notes and other liabilities evidenced by paper, and (6) other borrowed funds. As with assets, the list should include, but not be limited to, these items.
74. In regard to other corporate entries, IAS 1.66 presents liabilities as follows: item (h) trade and other payables (short-term liabilities); item (i) tax liabilities, which are recognized in the Guide if unpaid tax amounts are actually owed to the general government; item (j) provisions; and item (k) noncurrent interest-bearing liabilities (long-term liabilities). The latter are recognized when an enterprise has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. These provisions include such items as product warranties and cleanup costs for environmental damage (IAS 37.19). The Guide prefers that provisions for estimated costs related to product warranties be included as a cost of sales and as a general reserve in capital. As with assets, the IASs do not prescribe the order or format in which items are to be presented but regard the items listed as sufficiently different in nature or function so as to deserve separate presentation on the balance sheet, along with subtotals as necessary, to present fairly the enterprise’s financial position.
Currency and Deposits
75. On the asset side, line 17 in Table 4.1, line 4 in Table 4.2, line 18 in Table 4.3, and line 12 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to financial assets (AF.2) in the balance sheet. On the liability side, line 24 in Table 4.1 and line 12 in Table 4.2 of the Guide correspond in the 1993 SNA’s full sequence of accounts to liabilities (AF.2) in the balance sheet.
76. In the IASs, for deposit takers, the closest equivalent to assets is the sum of items identified as cash and balances with the central bank and placements with other banks (IASs 30.19 and 30.21). For other sectors, the closest equivalent is cash (cash on hand and demand deposits) and, perhaps, some element of cash equivalents (short-term highly liquid investments (IAS 7.6)). In IAS 7.8, overdrafts can be recorded as part of cash and cash equivalents rather than as loans, as recommended in the Guide.
77. In the IASs, deposit takers’ currency and deposits liabilities are equal to the sum of deposits from other banks and amounts owed to other depositors (IAS 30.19).
78. On the asset side, line 18(i) in Table 4.1 and line 5 in Table 4.2 of the Guide correspond in the 1993 SNA’s full sequence of accounts to loans (AF.4) in the balance sheet. Similarly, on the liability side, line 25 in Table 4.1, line 13 in Table 4.2, line 25 in Table 4.3, and line 18 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to loans (AF.4) in the balance sheet.
79. In the IASs, for deposit takers, on the asset side, loans most closely equate to the sum of loans and advances to customers and loans and advances to other banks (other than the central bank) (IAS 30.19). The latter item can be easily identified as placements with other banks should be separately identified (IAS 30.21) and excluded from the item “placements with, and loans and advances to, other banks” to provide information on loans. On the liability side, loans would be a subitem within other borrowed funds. In the IASs, specific and general provisions for loan losses can be deducted from the carrying amount of the appropriate category of loans (IAS 30.45). However, deposit takers should disclose the aggregate amount of provisions for loan losses at the balance sheet date (IAS 30.43c). Loans are defined in IAS 39.10 [39.9].
80. For other corporate entities, on the asset side, loans will be a subitem of other financial assets. On the liability side, overdrafts can be included within cash and cash equivalents (IAS 7.8), while loans are also to be included within noncurrent interest-bearing liabilities (IAS 1.66).
81. On two specific issues, the treatment of securities repurchase agreements (repos) in the IASs is consistent with the collateralized loan approach in the Guide (IAS 39.10 and IASs 39.35–39.39) [IAS 39. AG.51]. Moreover, the IASs’ treatment of financial leases is substantially the same as for loans (IAS 17) and is consistent with the classification of loans in the Guide.
82. Line 18(i.i) in Table 4.1 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to loans to deposit takers (AF.4 S.122) in the balance sheet.
83. In the IASs, this line is equal to loans and advances to other banks and excludes placements with other banks (IAS 30.19 and 30.21). In other words, compared with the item in IAS 30.19, placements with other banks should be separately identified (IAS 30.21) and excluded from the item “placements with, and loans and advances to, other banks” to provide information on loans.
84. Line 18(i.ii) in Table 4.1 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to loans (AF.4) less loans to deposit takers (AF.4 S.122) in the balance sheet. In the IASs, this line is equal to loans and advances to customers (IAS 30.19).
Sectoral and Geographical Distribution of Loans
85. Line 18(i) in Table 4.1 of the Guide can be attributed by institutional sector. In the 1993 SNA’s full sequence of accounts, this sectoral detail corresponds to items AF.4 S.1–AF.4 S.2.
86. The 1993 SNA does not specify the geographical location of the debtor, except for the resident and nonresident distinction.
87. IAS 14 establishes principles for reporting financial information by business and geographic segment. Business segments are determined by the type of products or services produced (IAS 14.9) and so could be considered broadly similar to the industrial classification of lending—one of the possibilities provided in the Guide. The geographic segment is based on providing goods and services within a particular economic environment and could be a single country, a group of two or more countries, or a region within a country (IAS 14.9). A country attribution would facilitate the regional attribution of lending described in the Guide. Moreover, sectoral and geographic analyses of concentrations of credit risk should be disclosed in accordance with IAS 30.40–30.41 and IASs 32.74–32.76 [IAS 32.83–32.85]. IAS 30.41 suggests that geographical areas may comprise individual countries or groups of countries, or regions within a country; customer disclosures may deal with sectors such as governments, public authorities, and commercial and business enterprises.
Specific Provisions for Loan Losses
88. As with nonperforming loans (NPLs), the 1993 SNA does not have a concept equivalent to specific provisions (line 18(ii) in Table 4.1) of the Guide. Loan values are not adjusted for provisions in the 1993 SNA. Therefore, until the loans are written off, provisions for impaired assets are implicitly and indistinguishably included as part of net worth (B.90) in the 1993 SNA’s full sequence of accounts.
89. In IAS 30.43c, the aggregate amount of the provision for losses on loans and advances by banks at the balance sheet date should be disclosed, so that users of financial statements know the impact that losses on loans and advances have on deposit takers’ financial positions (IAS 30.47). In contrast to the Guide, both specific and general loan loss provisions are included in the disclosure (IAS 30.45). (The difference arises because in the Guide, the FSI of loans less provisions nets specific provisions only, whereas in the IASs both specific and general provisions are netted against the value of loans.)
90. On the asset side, line 19 in Table 4.1, line 6 in Table 4.2, line 19 in Table 4.3, and line 13 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to securities other than shares (AF.3) in the balance sheet. Similarly, on the liability side, line 26 in Table 4.1, line 14 in Table 4.2, and line 26 in Table 4.3 of the Guide correspond to securities other than shares (AF.3) in the balance sheet in the 1993 SNA.
91. For deposit takers, on the asset side, line 19 in Table 4.1 of the Guide corresponds to the sum of treasury bills and other bills eligible for discount at the central bank, other money market placements, the debt securities element of government and other securities for dealing purposes, and investment securities (IAS 30.19).12 Separate identification of debt securities from within these latter two items may not be provided in the main financial statements, but in accordance with IAS 32.60(c) [IAS 32.71(c)], supplementary information should indicate which of the enterprise’s financial assets are not exposed to interest rate risk, such as some investments in equity securities. This supplementary information, used in conjunction with items on government and other securities for dealing purposes as well as investment securities, may permit the identification of holdings of debt securities, depending on the level of detail provided in the published accounts (see also IAS 32.64) [IAS 32.74].
92. For deposit takers, on the liability side, line 26 in Table 4.1 of the Guide corresponds to the sum of certificates of deposit, other money market deposits, promissory notes, and other liabilities evidenced by paper (IAS 30.19), and the debt securities element of “other borrowed funds.”
93. For other corporate entities, on the asset side, debt securities correspond to the debt securities element of cash equivalents and financial assets not otherwise identified. Unless further subclassification is required, debt securities might not be identifiable in the IASs.
Insurance Technical Reserves
94. On the assets side, line 8 in Table 4.2 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to AF.6 in the balance sheet. Similarly, on the liability side, line 15 in Table 4.2 of the Guide corresponds to AF.6 in the balance sheet in the 1993 SNA. IASs do not have disclosure requirements specific to insurance technical reserves. However, in accordance with IAS 1.67, additional items should be presented on the balance sheet, when such a presentation is necessary to fairly represent the enterprise’s financial position. IFRS 4 concerns accounting for rights and obligations arising under insurance contracts.
95. On the asset side, line 21 in Table 4.3 of the Guide corresponds in the 1993 SNA’s full sequence of accounts to trade credit and advances (AF.81) in the balance sheet. Similarly, on the liability side, line 27 in Table 4.3 of the Guide corresponds to AF.81 in the balance sheet in the 1993 SNA.
96. In the IASs, on the asset side, line 21 in Table 4.3 of the Guide corresponds most closely to trade and other receivables and, line 27 on the liabilities side, to trade and other payables (IAS 1.66).
Shares and Other Equity
97. On the asset side, line 20 in Table 4.1, line 7 in Table 4.2, line 20 in Table 4.3, and line 14 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to AF.5 in the balance sheet. However, in practice there may be a difference, depending on how equity investments in associates and unconsolidated subsidiaries are valued. This issue is briefly discussed in terms of foreign affiliates in paragraph 13.74 of the 1993 SNA.
98. In the IASs, for deposit takers, line 20 in Table 4.1 of the Guide corresponds to the equity securities element of government and other securities held for dealing purposes and to investment securities (IAS 30.19). Separate identification of equity securities from within these two items may not be provided in the main financial statements, but in accordance with IAS 32.60(c) [IAS 32.71(c)], supplementary information should indicate which of the enterprise’s financial assets are not [directly] exposed to interest rate risk, such as some investments in equity securities. For nonbank corporations, equity securities are included within investments accounted for using the equity method and other financial assets (IAS 1.66). Accounting by the equity method refers to investments in associates (IAS 28.6) and unconsolidated subsidiaries (IAS 27.30), essentially valuing such investments initially at cost and thereafter at the investor’s share of net assets of the investee (IAS 28.3).
99. On the asset side, line 21 in Table 4.1, line 9 in Table 4.2, line 22 in Table 4.3, and line 15 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to financial derivatives (AF.7) in the balance sheet. On the liabilities side, line 29 in Table 4.1, line 18 in Table 4.2, line 30 in Table 4.3, and line 21 in Table 4.4 of the Guide correspond to AF.7 in the balance sheet in the 1993 SNA.13
100. In IAS 39.10 [IAS 39.9], financial derivatives are defined, and with the exception of commodity derivatives (see below), this definition is consistent with that in the Guide (see also IASs 32.9–32.11). IAS 39.10 [IAS 39.9] makes it clear that financial derivatives are to be recognized as financial instruments and recorded at fair value in profit and loss, except when they are designated and effective hedging instruments. While the IASs do not make specific recommendations for the separate identification of positions in financial derivatives, in accordance with IAS 39.27 [IAS 39.14], financial derivatives are recognized on the balance sheet.14 Regarding commodity derivatives, whereas the Guide includes such derivative contracts within its definition, in the IASs there is some flexibility in that contracts specifically settled in cash according to a formula are classified as financial derivatives, but not otherwise. This is because the IASs do not recognize as financial instruments contracts to deliver goods and services (IASs 32 A9–17) [IASs 32 AG.20–24].
101. Line 22 in Table 4.1, line 10 in Table 4.2, line 23 in Table 4.3, and line 16 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to the sum of insurance technical reserves (AF.6) and other accounts receivable (AF.8) (excluding trade credits (AF.81) for nonfinancial corporations, as it is separately identified in the Guide) in the balance sheet.
102. In the IASs, these lines most closely correspond to the trade and other receivables (IASs 1.66 and 39.10) [IAS 39 AG.26]—although the trade credit element for nonfinancial corporations is separately identified in the Guide—and to tax assets (IAS 1.66). However, in contrast to the Guide, when the future economic benefit is the receipt of goods or services rather than the right to receive cash or another financial asset, such benefits are not recognized as a financial asset (IAS 32.12) [IAS 32 AG.11]. Nonetheless, if taxes paid exceed the amounts due for the period, the excess should be regarded as an asset (IAS 12.12). Under certain circumstances, in contrast to the Guide, the IASs recognize deferred tax assets (IAS 12.24)—essentially when it is probable that taxable profits will be available against which tax benefits arising from past losses can be utilized. With regard to obligations under insurance contracts, IAS 32 explicitly excludes them from financial instruments (IAS 32.1) except for certain reinsurance and investment contracts issued by insurance companies (IAS 32.3). IAS 38 notes that contracts involving insurance companies are specialized and give rise to accounting issues that need to be dealt with in a different way (IAS 38.6).15
103. Line 27 in Table 4.1, line 16 in Table 4.2, line 28 in Table 4.3, and line 19 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to other accounts payable (AF.8) (excluding trade credits (AF.81) for nonfinancial corporations as they are separately identified elsewhere) and possibly insurance technical reserves (AF.6) (except for such liabilities of other financial institutions, which are separately identified elsewhere) in the balance sheet. In the IASs, these lines most closely correspond with the trade credit and other payables (excluding those elements included under other items) and with tax liabilities to the extent that they are amounts owed on profits already earned (IAS 12.5).
104. Line 28 in Table 4.1, line 17 in Table 4.2, line 29 in Table 4.3, and line 20 in Table 4.4 of the Guide correspond in the 1993 SNA’s full sequence of accounts to the sum of liabilities in the form of deposits (AF.2), securities other than shares (AF.3), loans (AF.4), liabilities for insurance technical reserves (AF.6), and other accounts payable (AF.8; see also IMF, 2000b) in the balance sheet.
105. In the IASs, for deposit takers, debt is the sum of deposits from other banks, other money market deposits, amounts owed to other depositors, certificates of deposit, promissory notes and other liabilities evidenced by paper, other borrowed funds (IAS 30.19), and tax liabilities (IAS 1.66), to the extent that they are amounts accrued and unpaid on profits already earned. For other corporate entities, debt is the sum of trade and other payables, noncurrent interest-bearing liabilities, and tax liabilities, to the extent that they are amounts accrued and unpaid on profits already earned (IAS 1.66).
Capital and Reserves
106. Line 30 in Table 4.1, line 19 in Table 4.2, line 31 in Table 4.3, and line 22 in Table 4.4 of the Guide closely correspond in the 1993 SNA’s full sequence of accounts to the sum of shares and other equity (AF.5) and net worth (B.90) in the balance sheet. There is a difference in that in the Guide, unlike in the 1993 SNA, the level of capital and reserves is affected by specific provisions against loans and, where applicable, other assets and by the exclusion of purchased goodwill. Moreover, to avoid double counting of deposit takers’ capital and reserves at the sector level, intrasector equity investments are excluded. In addition, a difference may arise from the different valuation approaches used to value equity investments in domestic associates and subsidiaries between the Guide and the 1993 SNA. In the Guide, the subcategorization of capital and reserves for deposit takers and nonfinancial corporations is derived from the IMF’s MFSM (IMF, 2000a, p. 34), and not the 1993 SNA. However, beyond the differences with the 1993 SNA mentioned above, there are differences in coverage between the Guide and the MFSM at the sub-categorization level. For example, in contrast to the MFSM, the Guide excludes general provisions from net income (and thus potentially from retained earnings) and includes them in capital and reserves.
107. In the IASs, capital and reserves most closely correspond in concept to total equity, which is the difference between assets and liabilities (and, as seen above, there are some differences in coverage of these instruments between the Guide and the IASs). Equity is the sum of issued capital, retained earnings, reserves representing appropriations of retained earnings, and reserves representing capital maintenance adjustments (IASB Framework, paragraph 65). Under IAS 1.74, information on issued capital should be disclosed. Capital maintenance adjustments are distinguished between financial and physical capital maintenance and are equivalent to holdings gains and losses on financial instruments that are not recorded in the income statement. The minority interest that may arise from consolidating a subsidiary is that part of the net assets of a subsidiary attributable to interests that are not owned directly or indirectly through subsidiaries by the parent (IAS 27.6). In accordance with IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, a financial instrument classified as an equity instrument by a subsidiary is eliminated on consolidation when held by the parent or presented by the parent in the consolidated balance sheet as a minority interest separate from the equity of its own shareholders. Hence, minority interest is part of capital and reserves.
Selected Memorandum Series
108. The Guide’s concept of liquid assets—as assets that are readily available to an entity to meet a demand for cash—does not have an equivalent in the 1993 SNA. Therefore, lines 39 and 40 in Table 4.1, and lines 41 and 42 in Table A3.4 of the Guide do not conceptually correspond to any 1993 SNA lines. Nonetheless, from the 1993 SNA’s full sequence of accounts, an approximation of the core measure of liquid assets is possible by summing currency (AF.21), transferable deposits (AF.22), (very) short-term loans (AF.41), and other accounts receivable (AF.8). Adding holdings of short-term (less than one year maturity) securities other than shares (AF.31) and perhaps holdings for shares and other equity (AF.5) provides an approximation of the wider measure. These measures of liquid assets will differ from the Guide in that certain assets are not covered (non-transferable deposits of less than three months’ maturity and long-term holdings of securities traded on liquid markets) and in that several assets that are covered should be excluded (nontradable short-term securities other than shares and other nontradable assets of more than three months’ maturity). For deposit takers, the Guide excludes from liquid assets any nontraded claims on other deposit takers.
109. The IASs focus more closely on liquidity than does the 1993 SNA. For deposit takers, from IAS 30.19 the following items equate most closely to liquid assets in line 40 in Table 4.1 of the Guide: cash and balances at the central bank, treasury bills and other bills eligible for rediscounting with the central bank, government and other securities held for dealing purposes, and market placements excluding those with other banks. However, any money market placements of more than three months’ maturity that cannot readily be converted into cash should be excluded. On the other hand, investment securities that are traded on liquid markets should be included. Moreover, IASs 30.30–30.39 require the disclosure of a breakdown of assets (and liabilities) into relevant maturity groupings based on the remaining period at the balance sheet date until the contractual maturity date—five maturity bands are suggested, the first two of which include assets with remaining maturities of three months or less.
110. For nonfinancial corporations, the closest equivalent to the concept of liquid assets used in the Guide is cash and cash equivalents—assets held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (IAS 7.7). For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition (IASs 7.6 and 7.7). Equity investments are excluded unless they are in substance cash equivalents (IAS 7.7). However, bank borrowings in the form of overdrafts that are repayable on demand can be included (deducted) as a component of cash and cash equivalents (IAS 7.8)—in contrast with the Guide, which classifies overdrafts as a liability item. Cash and cash equivalents, together with trade receivables with three months or less to maturity, are close in concept to the core measure of liquid assets in the Guide. Such instruments are covered within other financial assets (IAS 1.66).
111. The Guide’s definition of what is short term and its definition of liabilities are the same as in the 1993 SNA. However, while in the 1993 SNA’s full sequence of accounts, short-term liabilities in the form of securities other than shares (AF.31) and loans (AF.41) are identified, this is not the case for deposits, other accounts payable, and financial derivatives.
112. The IASs have a similar, but not identical, over- and under-one year maturity distinction to that used in the Guide (IAS 1.60 and the glossary in IASB ), unless the enterprise’s operating cycle is different from a one year—in which case the boundary with long term is different. Disclosure of information on current liabilities in accordance with IAS 1.60 provides a measure of short-term liabilities that is broadly consistent with the Guide’s definition. Moreover, a bank should disclose a breakdown of liabilities (and assets) into relevant maturity groupings based on the remaining maturity at the balance sheet date until the contractual maturity date, in accordance with IAS 30.30. As for assets, IAS 30.33 suggests distinguishing financial liabilities into five maturity groupings.
113. As with liquid assets, the 1993 SNA does not have a concept corresponding to nonperforming loans. In the 1993 SNA’s full sequence of accounts, such loans are indistinguishably included as part of loans (AF.4). Thus, the stock of NPLs cannot be derived from the 1993 SNA.
114. IAS 39.110 [IAS 39.58–39.70] provides guidance on identifying assets that may be impaired that is broadly consistent with the approach in the Guide. Whereas the Guide places more emphasis on past due payments exceeding a time limit, guidance on impairment in IAS 39 covers both actual breaches of contract (although no overdue date is recommended) and other evidence of impairment. In addition, IAS 30.43 states that a bank should disclose (a) the accounting basis used to determine the carrying amount of uncollectible loans and advances, (b) details of changes in any allowance account for impairment allowances, (c) the aggregate amount of any allowance account for impairment losses at the balance sheet date, and (d) the aggregate amount included in the balance sheet for loans and advances on which interest is not being accrued.16 The basis used to determine when to stop accruing interest may vary across enterprises and may differ from the 90-day guidelines suggested in the Guide.
Foreign-Currency-Denominated Assets and Liabilities
115. The 1993 SNA does not define foreign currency assets and liabilities (although this information may be available to economic statisticians from the source data used to construct the national accounts).
116. IAS 32.43(i) [IAS 32.52(a)(i)] requires disclosure of information that assists users of financial statements in assessing the extent of risks associated with, among other things, currency risk—the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. However, the standards do not prescribe either the format or level of detail of the information to be disclosed (IASs 32.44–32.45) [32.51–32.52].
Net Open Position in Foreign Exchange
117. The 1993 SNA does not provide any equivalent concept. Under IAS 30.40, a bank should disclose the amount of any significant net foreign currency exposures.
118. The 1993 SNA does not have a concept of large exposures because it is concerned with aggregate economic statistics rather than with the credit risks faced by individual institutional units. Under IAS 30.40, a bank should disclose any significant concentration of its assets, liabilities, and off-balance-sheet items. Such disclosures should be made using breakdowns by geographical areas, customer or industry groups, or other concentration of risk that are appropriate in the circumstances of the bank. IAS 32.74 [IAS 32.83] notes that identification of significant concentrations is a matter of judgment by management, taking into account the circumstances of the enterprise and its debtors. Disclosure of concentrations of credit risk includes a description of the shared characteristic that identifies each concentration and the amount of the maximum credit risk exposure associated with all recognized and unrecognized financial assets sharing that characteristic (IAS 32.76) [IAS 32.85].
119. In the 1993 SNA’s full sequence of accounts, there is no separate identification of arrears (line 70 in Table A3.2), although such an item can be included as memorandum item (1993 SNA, 11.101). Arrears are not discussed in the IASs.
IASs of 2002 (IASB, 2002). The information presented within square brackets refers to relevant paragraph numbers in the International Financial Reporting Standards (IFRS) as of March 31, 2004, which will come into effect on January 1, 2005 (IASB, 2004). The IFRS also contains revisions affecting the treatment of financial instruments, which are found mostly in IAS 32 and IAS 39.
The 1993 SNA also has a concept of value added that is related to the production process.
As in “Framework for the Preparation and Presentation of Financial Statements” of IASB (2002).
FSIM measures the output of the deposit-taking sector arising from the margins earned from the borrowing and lending of funds. See 1993 SNA, paragraphs 6.124 to 6.131.
Since loans are issued at par, the effective rate for loans is the same as the contractual rate. If the issue price of the asset is different from par, the effective yield would be different from the stated interest (coupon) rate.
A corporation consuming these services would record them as intermediate consumption (P2) in the Production Account.
Both the Guide and the 1993 SNA recommend that securities be valued at market value and that gains and losses be reported under gains and losses on financial instruments, thus eliminating the need for provisions on securities.
The revised version of IAS 39 provides for several methods to deal with decreases in the amount of impairment or bad debt loss depending on the valuation basis used to carry the instrument on the balance sheet [IASs 39.65, 39.66, and 39.70]. For some instruments, increased value as a result of reductions in impairment will be taken directly to income, but others are handled through adjustments to an allowance account.
The economic benefits of financial assets can include primary incomes derived from the use of the asset and the possibility of holding gains.
In the 1993 SNA, by convention, monetary gold and SDRs are financial assets, although there is no counterpart liability.
To strictly conform with the Guide, interest should not accrue on nonperforming assets. However, it is proposed in Chapter 4 that if loan data are available for deposit takers only inclusive of such interest, the amount of accrued interest on nonperforming loans be reported and included together with specific provisions for loan losses. In principle, the same approach should be taken for other assets.
In accordance with IAS 32. A20–21 [IAS 32.18a], a preferred share that provides for redemption for a fixed or determinable amount on a fixed or determinable future date or at the option of the holder meets the definition of a debt security if the issuer has an obligation to transfer financial assets to the holder of the preferred share. This is consistent with the Guide’s definition of a debt instrument as being one on which future payments of interest and/or principal are required.
Under IAS 39.23, among other things, if an instrument with an embedded derivative is not valued at fair value and changes in that value are reported in net profit and loss, the embedded derivative should be separately recognized. In the Guide, there are no circumstances under which an embedded derivative is separately identified.
IFRS 4, which amends IAS 32 and IAS 38, concerns financial reporting for insurance contracts by any entity that issues such contracts. It allows the continuation of existing accounting practices until the IASB completes the second phase of its project on insurance contracts.
The IAS 39 recommends continuing accrual of interest on impaired loans at the discount rate used to revalue an impaired asset (IAS 39.116) [IAS 39.63], whereas IAS 30 discusses loans on which interest has stopped accruing.