Concepts and definitions

Balance of payments

The balance of payments (BOP) statistics describe the external stability of the economy in terms of both real and financial transactions and is part of the system of national accounts. The balance of payments is comprised of current, capital and financial accounts. The current account depicts the effects of foreign transactions, such as the trade in goods and services, primary income and secondary income, on the national income and on the balance between savings and investments in the economy. The capital account only contains capital transfers. The financial account describes how the surplus or the deficit in the current account is invested or financed to and from abroad, respectively. The financial account comprises changes in foreign direct investment, portfolio investment, other investment, financial derivatives and central bank reserve assets.

The instructions and recommendations of the International Monetary Fund Balance of Payments Manual (sixth edition of 2009) are applied in the compilation of the BOP statistics. Guidance is also provided by the European Central Bank (ECB) (financial account) and Eurostat (current account) in the EU and by the OECD (foreign direct investment).

CIF-FOB conversion

Finnish Customs compiles statistics on imports of goods at CIF value. In balance of payments, imports of goods are at FOB value. To attain the FOB value, freight and insurance costs between the ports of loading and destination are deducted from imports of goods.

Capital account

The capital account covers capital transfers and the acquisition/disposal of non-produced non-financial assets.

Capital transfers

Capital transfers are composed of investment subsidies and other capital transfers (eg transfers of ownership of fixed assets and debt forgiveness). The bulk of capital transfers in Finland's balance of payments are investment subsidies, while other capital transfers are insignificant. Investment subsidies are mainly related to payments from the EU's structural and agricultural funds to private and public sectors.

Capital transfers statistics are based on administrative data, mainly central government financial statement information, available to Statistics Finland.

Central bank reserve assets

Central bank reserve assets are statistically compiled in accordance with the instructions of the International Monetary Fund (IMF) and the European Central Bank (ECB). The reserve assets comprise monetary gold, special drawing rights (SDRs), the reserve position in the IMF and other reserve assets. Other reserve assets include currency and deposits, securities, financial derivatives and other claims. The exchange rate used is the spot rate prevailing at the value date, and the items are entered at market prices.

Data on reserve assets in the balance of payments are based on the Bank of Finland's book-keeping.

Compensation of employees

Compensation of employees is recorded when the employer (the producing unit) and the employee are resident in different economies. For the economy where the producing units are resident, compensation of employees is the total remuneration (including contributions paid by employers to social security schemes or to private insurance or pension funds), in cash or in kind, payable by resident enterprises to non-resident employees in return for work done by the latter during the accounting period. For the economy where the individuals are resident, compensation is the total remuneration, in cash or in kind, receivable by them from non-resident enterprises in return for work done during the accounting period. It is important to establish whether an employer-employee relationship exists; if not, the payment constitutes a purchase of services.

Current account

The current account shows flows of goods, services, primary and secondary income between residents and non-residents.

Deposits

Deposits are fixed-term or redeemable immediately on demand. They can be used to make payments, with no charges or limitations related to their use. Receivables in cash also belong to deposits. Information on interbank deposits needed for BOP purposes is derived from MFI balance sheet statistics. Interbank deposits are short-term by nature and large by volume and highly volatile.

As a result of the new statistical standards (ESA 2010), the line between deposits and loans changes so that there can no longer be loans between monetary financial institution (MFIs) - items previously recorded as loans between MFIs will now be recorded as deposits.

Direct investment

A direct investment relation exists between an investor and an object resident in another country when the investor has control (over 50% of the voting power) or influence (from 10% to 50%) over the object. The direction of the investment (inward or outward) is determined in the statistics on the basis of the direction of the control/influence between parties. Direct investment refers to financial transactions between entities in a direct investment relationship.

The capital of direct investments is divided into equity and debt-based items. The counter item of gains from reinvested earnings recorded in the current account is recorded in equity. Equity includes transactions with shares in corporations, share subscriptions in rights issues and other investment of basic capital. The debt-based capital of direct investments includes individual loans, leasing credits, deposits in consolidated accounts, subordinate loans comparable to equity, trade credits, accrued charges/credits and deferred credits/charges, bonds, and money market instruments. If both the creditor and debtor have other financial intermediation than insurance activities, only so-called perpetuals are classified as debt-based capital of direct investments.

The new statistical standards (BPM6/BD4) recommend that the receivables/liabilities principle is applied to direct investments in statistics on in balance of payments and international investment position. Similarly, the revised directional principle is recommended to be applied in connection with examinations of direct investments by country or sector. The revised directional principle separates investments between fellow enterprises and the direction of the direct investment relationship between fellow enterprises is determined by the residency of their ultimate controlling parent enterprise (UCP).

Errors and omissions

The errors and omissions in the balance of payments are the net of all biases and missing data. The errors and omissions are calculated as the difference between the sum of the current and capital accounts and the financial account in a given period. The errors and omissions are relatively larger in monthly and quarterly statistics than annually, because the timing differences disappear in the annual data to a great extent. The foreign transactions of large international companies have led to considerable volatility in statistics, and in an environment of monetary union the counterparts of their transactions are not necessarily reflected in Finland's balance of payment statistics. Timing differences in recording may also cause large errors and omissions or large consecutive errors and omissions of different signs.

Financial account

The financial account describes how the surplus or the deficit in the current account is invested or financed to and from abroad, respectively. The financial account comprises changes in foreign direct investment, portfolio investment, other investment, financial derivatives and central bank reserve assets. The sub-items of other investments include loans and deposits, trade credits, other equity, SDR allocations, insurance, pension and standardised guarantee schemes, and other accounts receivable/payable. The sectoral breakdown conforms to the official classification applied, for example, in the system of national accounts.

Financial derivatives

Financial derivatives are financial instruments the price of which is determined by the value of another asset. Such an asset, ie the underlying asset, can in principle be any other product, such as a foreign currency, an interest rate, a share, an index or a commodity. Financial derivatives include various options, warrants, forward contracts, futures and currency and interest rate swaps.

The transactions related to financial derivatives and the corresponding stocks of assets and liabilities are compiled separately, detached from underlying assets. Capital flows arising from financial derivatives are recorded as gross changes, so their flow data are broken down into assets and liabilities. Payment flows (cash flows) resulting from contracts entered into with non-residents and materialised during the reference period are recorded in gross changes. Such flows include, for example, premiums paid at inception of standardised derivative contracts, interim payments made during the life of the contracts (non-repayable margin payments) and net value payments made at the close of the contracts, as well as all net payments between the parties related to non standardised contracts.

The stock data of financial derivatives are broken down into assets and liabilities. The asset stock is fined as the sum of derivative contracts with a positive market value, and the liabilities stock, in turn, as the sum of derivative contracts with a negative market value. The market value of a contract is positive for a Finnish reporting entity when its non-resident counterparty would have a net payment obligation vis-à-vis the Finnish reporting entity if the contract were to be settled immediately (ie at the end of the month). Conversely, the market value is negative when the domestic reporting entity would have a net payment obligation vis-à-vis its non-resident counterparty. The values of assets underlying derivative instruments are not recorded under derivative contract values.

Financial intermediation services indirectly measured (FISIM)

Actual interest can be considered as including both an income element and a charge for a service. Lenders and deposit takers operate by providing rates of interest to their depositors that are lower than the rates that they charge to their borrowers. The resulting interest margins are used by the financial corporations to defray their expenses and to provide an operating surplus. By convention, these indirect charges in respect of interest apply only to loans and deposits, and only when those loans and deposits are provided by, or deposited with, financial corporations.

General merchandise on a balance of payments (BOP) basis

The item General merchandise on a balance of payments (BOP) basis includes goods whose ownership is transferred between a domestic and foreign unit and that do not belong to another special category, such as goods under merchanting, non-monetary gold and are not part of a service. General merchandise is recorded at market value and is based on the free on board (FOB) principle.

Gold, non-monetary

Non-monetary gold covers all gold other than monetary gold. Monetary gold is owned by monetary authorities and held as a reserve asset. Non-monetary gold can be in the form of bullion (i.e. coins, ingots, or bars with a purity of at least 995 parts per 1,000, including such gold held in allocated gold accounts), gold powder, and gold in other unwrought or semi-manufactured forms.

Goods

This component covers moveable goods for which a change of ownership occurs between residents and non-residents. It includes the item general merchandise on a balance of payments (BOP) basis, net exports of goods under merchanting and non-monetary gold.

Insurance, pension and standardised guarantee schemes

Insurance, pension and standardised guarantee schemes items include

a) non-life insurance technical reserve;

b) life insurance and annuity entitlements;

c) pension entitlements, claims of pension funds on pension managers, and entitlements to non-pension funds;

d) provisions for calls under standardised guarantees.

International investment position

The international investment position (IIP) statistics illustrate the foreign asset and liability stocks accumulated as a result of financial account capital flows. The statistics are recorded at the end of the period.

The instructions and recommendations of the International Monetary Fund Balance of Payments Manual (sixth edition of 2009) are applied in the compilation of the IIP statistics. Guidance is also provided by the European Central Bank (ECB) in the EU and by the OECD (foreign direct investment).The IMF investment-type IIP classification separates direct investment, portfolio investment, other investment, financial derivatives and central bank reserve assets. The sub-items of other investments include loans and deposits, trade credits, other equity, SDR allocations, insurance, pension and standardised guarantee schemes, and other accounts receivable/payable. The sectoral breakdown conforms to the official classification applied, for example, in the system of national accounts.

Investment income

Investment income is derived from a resident's ownership of an external financial asset (credit) and symmetrically, income derived from a non-resident's ownership of a domestic financial asset (debit). Investment income includes income on equity (dividends, withdrawals from income of quasi-corporations, reinvested earnings) and on debt (interest), and investment income attributable to policyholders in insurance, pension schemes, and standardised guarantee schemes.

In balance of payments, investment income is also classified according to the function of the underlying investment, as direct investment, portfolio investment, other investment or reserve assets, and further detailed according to the type of investment.

Where they are separately identifiable, gains and losses on (capital) holdings are not classified as income on investments, but as changes in the value of investments due to market price developments. Net flows associated with interest rate derivatives are recorded solely under financial derivatives in the financial account.

Loans

Loans are bilateral credit agreements between the lender and the borrower and are non-marketable. Long-term leases are also included in loans. This type of financial leasing is a normal procedure in leasing ships and large machinery. Repurchase agreements on securities, ie repos, are recorded under this item in accordance with international accounting standards, although they are not loans from the legal point of view. Repo transactions correspond to collateralised loans in which securities originally owned by the seller are used in security for the loan. Private placement bonds also conceptually belong to the loan category.

As a result of the new statistical standards (ESA 2010), the line between deposits and loans changes so that there can no longer be loans between monetary financial institution (MFIs) - items previously recorded as loans between MFIs will now be recorded as deposits.

Loan drawdowns and redemptions are not separately compiled for Finland's BOP statistics, but loans are reported in the surveys as net changes (drawdowns less redemptions). Objects rented in financial leasing are recorded under goods trade and the rent under loans. Payments of rent are entered into redemptions and interest under interest on other investment.

Net exports of goods under merchanting

Merchanting is defined as the purchase of goods by a resident (of the compiling economy) from a non-resident, combined with the subsequent resale of the same goods to another non-resident without the goods being present in the compiling economy. Net exports of goods under merchanting represent the difference between sales over purchases of goods for merchanting. This item includes merchants' margins, holding gains and losses, and changes in inventories of goods under merchanting.

Other accounts receivables/payables

Other accounts receivables/payables include, for example, interbank claims and liabilities in payment transmission, term of payment-related claims and liabilities in securities transactions, insurance companies' reinsurance accounts payable and receivable as well as deposits, and corporate financing based on bills of exchange. Claims that cannot be recorded under any other BOP category are also recorded under other capital.

Other equity

The item Other equity includes capital investments (such as holdings in international organisations) that are not part of portfolio or direct investments.

Other investment

Other investments include loans and deposits, trade credits, other equity, SDR allocations, insurance, pension and standardised guarantee schemes, and other accounts receivable/payable.

Other primary income

Other primary income consist of taxes on production and imports, subsidies and rents for natural resources.

Portfolio investment

Portfolio investment is considered to include securities transactions not belonging to direct investment and reserve assets. Portfolio investment refers to securities transactions in which the ownership or voting power after the investment remains below 10%. As securities transactions are valued at market prices, capital gains realised in connection with a change of ownership are reflected in valuation adjustments between stocks and flows.

Securities traded are divided into equity and debt securities. Equity securities are shares, participations and mutual fund shares. Debt securities include bonds and money market paper.

Income generated from mutual funds' share holdings are divided into profits (dividends) and reinvested earnings. Reinvested earnings are included in the security investments in the financial account while profits (dividends) are included in the primary income in the current account.

Data on security investments are collected in the inquiry on foreign financial assets and liabilities and from data collections carried out by the Bank of Finland. The Bank of Finland collects data by security and in their classification use is made of the European Central Bank's centralised database on securities, which contains basic data on nearly all securities under active trading globally.

Primary income

Primary income represents the return that accrues to institutional units for their contribution to the production process, or for the provision of financial assets or from renting natural resources to other institutional units. It comprises compensation of employees, investment income and other primary income.

SDR allocations

The allocation of special drawing rights (SDRs) to IMF members is shown as a liability incurred by the recipient under SDRs in other investment. A corresponding entry is recorded under SDRs in reserve assets.

Secondary income

The secondary income account shows current transfers between residents and non-residents. A transfer is an entry that corresponds to the provision of a good, service, financial asset or other non-produced asset by an institutional unit to another institutional unit where there is no corresponding return of an item of economic value. Current transfers consist of all transfers that are not capital transfers. Current transfers are classified according to the institutional sector making or receiving the transfer in the compiling economy (general government or other sectors).

General government current transfers comprise current taxes on income, wealth, etc., social contributions, social benefits, current international cooperation, miscellaneous current transfers, VAT and GNI-based Union own resources.

Other sectors' current transfers comprise current taxes on income, wealth, etc., social contributions, social benefits, miscellaneous current transfers, net non-life insurance premiums, non-life insurance claims and adjustments for the changes in pension entitlements. Miscellaneous current transfers include personal transfer between resident and non- resident households (of which workers' remittances).

Services

Services are the result of a production activity that changes the conditions of the consuming units, or facilitates the exchange of products or financial assets. Services are not generally separate items over which ownership rights can be established and cannot generally be separated from their production. Services include the following items:

a) Manufacturing services on physical inputs owned by others

b) Maintenance and repair services not included elsewhere (n.i.e.)

c) Transport

d) Travel

e) Construction

f) Insurance and pension services

g) Financial services

h) Charges for the use of intellectual property n.i.e.

i) Telecommunications, computer, and information services

j) Other business services

k) Personal, cultural and recreational services

l) Government goods and services n.i.e.

Trade account

The trade account describes the balance of foreign trade in goods in terms of exports and imports.

Trade credits

Export claims and advances as well as import accounts payable and advances are classified under trade credits. Trade credits refer to trade credits related to goods and services trade, such as accounts payable, supplier credits (term of payment granted by foreign sellers), trade payables and advances received from foreign buyers for the current or future delivery of goods or services.

Trade credit data are collected in connection with surveys on the foreign assets and liabilities of companies and government bodies. The figures on trade credits, obtained from business surveys used for the regular, intra-year compilation of statistics, are increased according to their coverage, because exporters and importers considerably outnumber the companies relevant for financial transactions.

Referencing instructions:

Official Statistics of Finland (OSF): Balance of payments and international investment position [e-publication].
ISSN=2342-348X. Helsinki: Statistics Finland [referred: 24.4.2018].
Access method: http://www.stat.fi/til/mata/kas_en.html

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