Accounting Framework and Sectoral Financial Statements

Pages:26-53
SUMMARY

Introduction. Accounting Framework. Income and Expense Statement. Balance Sheet. Sectoral Financial Statements. Deposit Takers. Income and expense. Balance sheet. Nonfinancial assets. Financial assets and liabilities. Memorandum series. Other series required to calculate the FSIs. Supervisory-based series. Series that provide a further analysis of the balance sheet. Balance-sheet-related series.... (see full summary)

 
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Introduction

4.1 Fundamental to understanding the financial condition of deposit takers, other corporations, and households is information from the traditional financial statements on income and expense, and the stock of assets and liabilities-the balance sheet. Data series obtained from such statements can be used to calculate many of the FSI ratios for corporations and households.

4.2 This chapter begins by outlining the traditional accounting framework from which financial statements are drawn, before presenting detailed sectoral financial statements and defining the line-item series. The guidance is provided to assist in the compilation of the component series required to calculate the FSI ratios. It draws on the relevant conceptual advice for other economic statistics, IASs, and supervisory guidance, and takes account of macroprudential requirements.

4.3 In addition to data reported by individual institutions, some data are required to make adjustments at the sector level, primarily to eliminate transactions and positions among institutions within the same sector. While sector-level data are discussed in more detail in Chapter 5, where appropriate the series required for sector-level adjustments are noted in footnotes in this chapter. 1

4.4 It is recognized that countries have different accounting systems and will rely on national sources of data to compile FSIs. For example, to compile data on a domestically controlled cross-border consolidated basis, compilers may rely on supervisory-based data. Some data series may not be collected, and others may not meet the definitions suggested in the Guide. In such circumstances, the data that most closely approximate the principles in the Guide should be used. In determining the need to collect new data, with the associated increased resource cost, authorities must make a judgment as to the likely impact and importance of the additional data series for compiling and monitoring FSI data.

4.5 In comments made on an earlier draft of the Guide, many compilers urged that flexibility be given to countries to take account of the differences in the readiness to adopt international standards. It was acknowledged that such flexibility may make comparison difficult between countries that have different criteria for recording information, increasing the importance of disseminating metadata (information about data). Such information could potentially give greater transparency.

4.6 Given these concerns, why does the Guide provide sectoral accounts and detailed definitions? First, such an approach supports compilation efforts at the national level by specifying how the series required to calculate FSIs are to be defined. Second, by providing a consistent framework that draws on relevant international standards, and takes account of analytical needs, a benchmark is provided for use by national compilers, even if their own national standards differ. Such a benchmark can be used as a reference when disseminating metadata. Third, such an approach helps foster greater comparability of data across countries-a medium-term objective in line with the views of the IMF Executive Board. In this regard, the definitions provided in this chapter can help guide the future development of sectoral financial data to be used to calculate FSIs.

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Accounting Framework

4.7 Outlined below are the key elements of financial statements.

Income and Expense Statement

4.8 This statement includes income and expenses related to the operations of the entity. After expenses have been deducted along with any dividends paid or payable to shareholders, any remaining income is transferred to the capital and reserves as retained earnings. As noted in Chapter 3, in the Guide income and expenses are recorded on an accrual rather than a cash basis. As defined in the Guide, net income before dividends measures the increase or decrease in value during the period that arises from the activities of the sector.

Balance Sheet

4.9 The balance sheet is the statement of assets, liabilities, and capital at the end of each accounting period: - Assets include both financial 2 and nonfinancial assets. - Liabilities include debt liabilities and financial derivatives. - The difference between the value of assets and liabilities is known in the Guide as capital and reserves. 3 This represents the "cushion" to absorb any losses arising from the income and expense statement, or for other reasons. If liabilities exceed assets, then the entity is technically insolvent.

4.10 Some liabilities and assets of corporations are contingent on a certain event(s) occurring and are recorded off balance sheet (see paragraph 3.12). As noted in Chapter 3, such items require monitoring to assess the full financial risk exposure of the corporation.

4.11 Measures of profitability and capital depend on the accounting definitions and recognition rules adopted. For instance, if valuation gains and losses on assets are recorded in the income and expense statement, they will affect the recorded profitability of corporations. Moreover, if some assets or liabilities are off-rather than on-balance sheet, this will affect measured capital. In developing the guidance on definitions set out below, to a varying extent three sources of accounting definitions are drawn upon. These are described in Box 4.1. The constituents of capital used in calculating the Basel capital adequacy ratio are described in Box 4.2.

4.12 Appendix IV provides a detailed reconciliation of the definitions set out in this chapter with those in both national and commercial accounting-the basic data sources most likely to be drawn upon. This appendix supplements the main text and can be drawn upon for additional guidance.

Sectoral Financial Statements

4.13 Sectoral financial statements are set out below on an institutional sector basis. While the income and expense statements and the balance sheets for the specific sectors have a considerable degree of overlap in terms of line-item series identified (particularly the balance sheets), there are significant differences in presentation between the sectors. These differences have implications for the calculation of FSIs. For instance, the net interest margin is an important FSI series for deposit takers but not for the household sector, for which gross disposable income is a more relevant measure. The deposit-taking sector is presented first, because of its central role in the financial system and the wider range of series from the sectoral financial statements required to calculate FSIs for deposit takers.

4.14 The line-item series in the financial statements for which definitions are provided are those required to calculate the FSIs set out in Chapters 6 and 7, either directly or as important building blocks in calculating the required aggregates. The advantage of defining these series within the framework of a financial statement is the accounting rigor that is imposed-the series are defined to ensure that the integrity of a double-entry recording system is maintained, while promoting a consistency of approach in the classification and coverage of transactions and positions. The conceptual guidance for the calculation of financial market FSIs is provided in Chapter 8.

4.15 Unless stated otherwise, each series presented below is defined only once, even if it appears in other sectoral financial statements. Most of the definitions are provided in the section covering the deposit takers' financial statement. It is recognized that there may need to be a degree of flexibility in interpreting this guidance when compiling data. When disseminating data, compilers are encouraged to document any significant differences between national practice and the guidance provided below.

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Box 4.1. Measurement Frameworks

In determining those accounting rules most relevant for the compilation of FSIs, three basic measurement frameworks can be drawn upon-national accounting, commercial accounting, as well as banking supervision guidance. This box aims to place these frameworks in context, explain their analytical purposes, describe their key characteristics, and provide references for further reading. It concludes by explaining that the FSI framework draws on these other frameworks but does not coincide with them because its analytical objectives are different.

National accounts data

The System of National Accounts (SNA) consists of a coherent, consistent, and integrated set of macroeconomic accounts, balance sheets, and tables based on a set of internationally agreed concepts, definitions, classifications, and accounting rules. The SNA provides a comprehensive accounting framework within which aggregated economic data can be compiled and presented in a format that is designed for purposes of economic analysis, decision making, and policymaking. Its intention is to provide comprehensive coverage of economic activities within an economy.

Central to the development of national accounts and the related methodologies is the concept of residence.The SNA groups resident institutional units into five resident institutional sectors and nonresident...

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