services account (ii) other services course on balance of payments and international investment...

Services Account (II)Other Services

Course on Balance of Payments and

International Investment Position Manual (BPM6)

IMF-PFTACNadi

November 22-December 1, 2010

BP19

Overview of Part II 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 Government goods and services n.i.e.

1

Construction 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 one-year 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)

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Recording of related goods and services pertaining to construction (viewpoint: construction abroad):

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

Construction: Recording of related goods and services (2)

22

Construction: Delineation between construction and FDI (3)

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 separate set of accounts (incl. a balance sheet)? production of significant scale managed through a local site office other

than the head office “for one year or more”? purchasing/renting business premises, recruiting local staff, operating a

bank account? subject to income taxes (even if exempted)?, and other legal

requirements 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

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Construction: example (4)

Example of the measurement of construction: Enterprise A, resident of A, provides construction services in B, with a total

value of $10,000. 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

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Example of the measurement of construction: Enterprise A, resident of A, provides construction services in B, with a total value of

$10,000. Entries in A’s BOP statement:

Credit Debit

Goods $500 (import from C)

Services $5,435(net) $4,565

$10,000

Income $2,110

Net acquisition of assets Net incurrence of liabilities

Financial account (-$500)+(-$2,110)+(-$4,565)

currency and deposits +$10,000

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Construction abroad comprises: 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: 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)

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Financial Services (1)

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

by explicit charges as margins on buying/selling transactions as deductibles from property income for asset-management costs indirectly, as FISIM

2


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


i) Explicit charges, thus no special calculation 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


ii) Margins on buying and selling transactions 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

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 In this case, there is no service charge)

4


iii) Asset management costs deducted from property income receivable some institutional units have the function of holding financial

assets on behalf of their owners 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


iii) Asset management costs deducted from property income receivable the counter-entry is to increase the net investment income

receivable to the gross income, before deduction of the expenses

credit debit

Financial service charge 2

Income receivable 10+2

c+d 10

6

Financial Services (7)(iv) Financial Intermediation Services Indirectly Measured

actual interest includes element of income as well as charge for service by convention, only arises from loans and deposits FISIM is calculated:

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 e.g. rate prevailing for interbank lending and borrowing should include no service component! should reflect risk and maturity structure of deposits and loans single rate for local currency transactions different rates for other currencies 7

FISIM: Example (8) 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)

Must be consistent with national accounts

BPM5 BPM6

credit debit credit debit

FISIM 35

Income 70 10 50 25

8

Charges for Use of Intellectual Property (1)

Covers transactions included under “royalties and license fees” in BPM5

Includes: Charges for the use of (i) franchise and trademarks, like in BPM5;

and (ii) outcomes of R&D But excludes:

outright purchases/sales of franchises and trademarks are recorded in the capital account

9

Charges for Use of Intellectual Property (2) Includes:

(iii) Licenses to reproduce, or distribute intellectual property embodied in

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: (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)

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Charges for Use of Intellectual Property (4) Practical issues:

Should follow accrual principle and charges should be spread over period of use In practice: may only be able to record when payments are made

May include aspects of property income—property income should be recorded separately In practice: may not be feasible

Charges may be called fees, commissions, royalties…

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Telecommunications, computer, and information services

New grouping of various items previously classified separately

defined in terms of the nature of the service, not the method of delivery

Telecommunications Includes

Broadcast or transmission by telephone, radio/television, email, etc. Internet services Business network services, teleconferencing, support services

(installation, etc) Excludes

value of the content being transmitted installation services for networks and database services

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Telecommunications, computer, and information services (2) Computer Services

Includes 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 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) Information Services

Includes News agency services (provision of news, photos, etc) to the

media Database services (design, storage, dissemination) through all

media (print, magnetic, optical, web search, etc) Direct nonbulk subscriptions to newspapers and periodicals by

any medium Library and archive services

Excludes bulk newspapers downloaded software

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Other Business Services (1) Includes

R&D Services Professional and management consultancy services Technical, trade-related, and other business services

R&D Services 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)

Professional and management services 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 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. 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

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Other Business Services (4)

An operating lease is distinguished from: 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

a resource lease, where the asset provided is a natural resource, rather than a produced asset Rent—classified as primary income However! What happens if split between buildings and

land not possible?

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) Audiovisual and related services.

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:

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) Other cultural and recreational services

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: 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 18

Government goods and services n.i.e.

Residual category goods and services supplied by and to enclaves, such as embassies, military

bases, and international organizations e.g., office supplies, vehicles, repairs, rental of premises, electricity

goods and services acquired from the host economy by diplomats, consular staff, and military personnel located abroad and their dependents 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 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) Includes: Life insurance and annuities, nonlife insurance,

reinsurance, freight insurance, pensions, standardized guarantees, auxiliary services

nonlife insurances are designed primarily to spread risks across all policy-

holders 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)

life insurances 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) reinsurance

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 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) Pension funds

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 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 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 servicesFor nonlife insurances (5)

Transactions between insurer and policyholder include: 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

Premiums earned + investment income earned on them – expected claims= margin that insurance company can retain

represents what is available to enterprise to cover costs and provide operating surplus

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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,…

…we have to identify five separate items: premiums earned premium supplements expected claims

claims payable adjusted for claims volatility

insurance technical reserves

Accrual principle. gross premiums paid vs. premiums earned (receivable) claims paid vs. claims incurred (payable)

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gross premiums earned: 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:

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

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claims payable: claims for events that occurred during the accounting period, even

if payment is made some time later Claims outstanding cover

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”

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adjustments for claims volatility: 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! volume / price of insurance services should not be affected by volatility of

claims

= difference between actual claims and a normally expected level 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 28


reserves in insurance: Premiums are paid in advance

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

since not all claims will be settled by the end of the financial year in which they arise 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 the income earned from it allows to charge lower premiums

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premium supplements: 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; 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)

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SummaryFor nonlife insurances (12)

Derived items for the BOP? (viewpoint: resident insurer) Goods and services account:

insurance services= gross premiums receivable + premium supplements - expected claims (actual claims payable plus adjustment for claim volatility)

Primary income account: investment income attributable to policyholder (premium supplements)

Secondary income account: net premiums receivable = gross premiums receivable + premium

supplements – insurance services claims payable

Financial account: insurance reserves, (increase in liability to insurances holder) (currency and deposits, i.e. premiums received; claims paid)

IIP: the stock of claims outstanding

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ExampleFor nonlife insurances (13)

Resident insurers with separate data on policyholders abroad: Premiums earned from abroad_________100 (premiums received

105) Claims payable abroad________________140 (claims paid 130)

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

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Derived items for the BOP? (viewpoint: resident insurer) Goods and services account:

insurance services= gross premiums receivable + premium supplements - expected claims (actual claims payable plus adjustment for claim volatility)

expected long-term claims: claims payable – adjustment: 140 – 40 = 100 100 + 5 – 100 = 5

Primary income account: investment income attributable to policyholder (premium supplements) = 5

Secondary income account: net premiums receivable= gross premiums receivable + supplements –

insurance service 100 + 5 – 5 = 100 claims payable = 140

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Derived items for the BOP? (viewpoint: resident insurer)

Financial account: insurance reserves, increase in liability to insurances holder 5 + 10 = 15 currency and deposits, decrease assets 105 – 130 = - 25

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More examples in BPM6, Appendix 6, or SNA 2008

Calculation of insurances with less available information

Calculation of life insurance services

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services account (ii) other services course on balance of payments and international investment...

Documents

construction enterprise

construction work

construction debits

construction insurance

construction projects

construction viewpoint

measurement of construction

services account