Reconciliation Between the Guide 's Methodology and National and Commercial Accounting

• Pages: 213-229

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

Overview

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 accu-

mulation accounts, as well as balance sheets showing

the stock of financial and nonfinancial assets and lia-

bilities 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), non-

financial 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 inter-

ested parties’ (mainly the shareholders’ and tax au-

thorities’) 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 compo-

nent of the value added by the entity during the re-

porting period).2It relies on specific norms and stan-

dards (for example, as set out in IASs) to achieve its

objectives with understandability, relevance, reliabil-

ity, and comparability.3The 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 sep-

arate standards, numbered IAS 1 to IAS 41 (IAS 25

has been withdrawn and IAS 15 is no longer bind-

ing). 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 recom-

mended 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

Appendix IV. Reconciliation Between the

Guide’s Methodology and

National and Commercial

Accounting

213

1IASs of 2002 (IASB, 2002). The information presented within

square brackets refers to relevant paragraph numbers in the Inter-

national 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 finan-

cial instruments, which are found mostly in IAS 32 and IAS 39.

2The 1993 SNA also has a concept of value added that is related

to the production process.

3As in “Framework for the Preparation and Presentation of

Financial Statements” of IASB (2002).

Financial Soundness Indicators: Compilation Guide

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 FSIM4are 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 Pro-

duction 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.5If debt

instruments are traded and market prices are estab-

lished, 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 dif-

ferent from that on issuance. The greater the vari-

ability of market prices, the more significant this dif-

ference 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 dis-

count the future cash flows for the purpose of mea-

suring the recoverable amount.

10. In “Sound Practices for Loan Accounting and

Disclosure,” the BCBS (1999) recommends in stan-

dard 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 im paired

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 non-

performing assets should not contribute to net inter-

est income.

Fees and Commissions Receivable/Payable

12. In the 1993 SNA, fees and commissions receiv-

able 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 distin-

guishes 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 sig-

nificant 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 invest-

ment. Such fees are regarded as an integral part of

generating an ongoing involvement with the finan-

cial instrument, and as such are deferred and recog-

nized 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

214

4FSIM 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.

5Since 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 dif-

ferent from par, the effective yield would be different from the

stated interest (coupon) rate.