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

Pages:213-229
SUMMARY

Overview. Income and Expense Account. Interest Income and Expense. Fees and Commissions Receivable/Payable. Gains/Losses on Financial Instruments (Including Foreign Exchange). Rent, Rental, and Royalty Income Receivable. Prorated Share of Income from Associates and Subsidiaries. Dividends Declared. Net Gains/Losses from Sales of Fixed Assets. Other Income. Personnel Costs Including Wages and... (see full summary)

 
FREE EXCERPT
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
Guides 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.

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