1. Item23: Financial Accounts
ESTP course on National Accounts
ESA 2010
Luxembourg, 30 May - 3 June Eurostat

2. This session will look at:
financial accounts and their position in the sequence of accounts
financial transactions, other financial flows and financial balance sheet
the financial instruments
the issues of valuation and consolidation
… and finish with an exercise.

3. What are financial accounts (1)
They are part of national accounts, the integrated set of economic accounts covering both real (non-financial) and financial transactions, other flows, and balance sheets
The balancing item of the non-financial accounts is net lending / net borrowing (B.9), which is conceptually equal to the balance of the financial account.
All transactions are recorded in monetary terms, but not all transactions are monetary.
The financial account records the financial transactions over the same period (whether as a means of settlement, borrowing, investing in shares, etc.), The balancing item of the financial account is also B.9 (labelled B.9f 'Net financial transactions' in the transmission programme).

4. What are financial accounts (2)
The term 'financial accounts' is commonly used to cover the financial account, other financial flows (other changes in volume, holding gains/ losses), and financial balance sheet.
They therefore record not only financial transactions but also changes in financial wealth (resulting from transactions and other flows), and the stock of financial net worth (BF.90).
The ESA measures not only changes in the real economy (GDP etc.) but also changes in wealth, and the stock of wealth (balance sheet), financial and non-financial, all as part of an integrated set of accounts.
Changes in wealth are not only the result of transactions, but also a variety of other flows, including losses resulting from natural disasters, revaluation of securites on the stock market, etc.
Identity for financial accounts (relating to financial assets and liabilities):
Opening balance sheet + transactions + other changes in volume + revaluation changes = closing balance sheet = opening balance sheet of the following period.

5. Financial accounts composition
Financial accounts comprise financial assets and liabilities, broken down by financial instrument and institutional sector. Each sector has its own set of financial accounts, which together comprise the total economy.
With the inclusion of the Rest of the world, the financial accounts balance across the sectors.

6. Financial transactions
Financial transactions are recorded in the financial account, by type of financial instrument.
They involve the acquisition of financial assets or occurrence of liabilities, by mutual agreement.
They occur either as counterparts of non-financial transactions (affecting B.9), or else involve only financial instruments.
Examples:
Buying a computer on credit:
Non-financial transaction with financial counterpart, followed later by a financial transaction (with financial counterpart), though there may also be interest payable.
Buying mutual fund shares via bank account:
Financial transaction (with financial counterpart)
Contingent liability:
For example, one-off guarantee in case of default. These are not recorded.

7. A financial (transactions) account
Typical presentation of each sector.
Note the possibility of negative net transactions in assets or liabilities.

8. Other financial flows and financial balance sheet
Other financial flows are changes in the value of financial assets and liabilities that do not result from transactions:
Other changes in volume
Holding gains / losses (revaluation a/c)
Financial balance sheet shows the stock of financial assets and liabilities, the balancing item of which is financial net worth (BF.90).
Examples of other financial flows:
Other changes in volume (K.1 to K.6):
destruction of evidence of ownership of a financial asset
Uncompensated seizure
Writing off a financial claim (a payment right)
Holding gains and losses (K.7):
Changes in the value of long-term debt securities (the price falls as market interest rates rise)
Equity gains / losses on the stock market, as measured by price indices
Sale of a loan other than at nominal value

9. Types of Financial instruments
AF.1 – Monetary gold and SDRs
AF.2 - Currency and deposits
AF.3 – Debt securities
AF.4 – Loans
AF.5 – Equity and investment fund shares or units
AF.6 – Insurance, pension and standardised guarantee schemes
AF.7 – Financial derivatives and employee stock options
AF.8 – Other accounts payable/receivable

10. Monetary gold and SDRs (F.1)
Monetary gold (F.11): held in reserve assets by monetary authorities. There is no counterpart liability for gold bullion.
SDRs (F.12): created by IMF and allocated to member states to supplement reserves.
Monetary gold:
Distinction now made between gold bullion and unallocated gold accounts with non-residents, which are claims against the gold account operator. Gold bullion is the only financial asset for which there is no counterpart liability.
Purchases and sales of gold bullion are recorded in assets.
(De)monetisation of gold is recorded in Other changes in volume account.
SDRs:
These are international reserve assets created by IMF and allocated to members to supplement their reserves. The corresponding liability is recognised in ESA 2010 as a claim on IMF participants collectively.

11. Currency and deposits (F.2)
Currency (F.21): notes and coins in circulation, including foreign currency held by residents.
Transferable deposits (F.22): exchangeable for currency on demand, at par, and directly usable for making payments.
Other deposits (F.29): time deposits etc., not withdrawable on demand without restriction or penalty.
Deposits are standardised non-negotiable contracts with the public at large, allowing placement and withdrawal of principal.
Transferable deposits - includes customers’ current accounts at banks, interbank deposits, deposits held by banks at central bank in excess of reserve requirements. But overdrafts are F.4 Loans.
Other deposits - covers time deposits with agreed maturity or at notice), savings deposits, savings schemes, non-negotiable certificates of deposit, short-term repo liabilities of MFIs.

12. Debt securities (F.3)
Defined as negotiable financial instruments serving as evidence of debt.
Short-term debt securities (F.31): one year or less by original maturity
Long-term debt securities (F.32)
Main features of debt securities:
Issue date and issue price
redemption date and price
original maturity and residual maturity
a coupon rate, fixed or variable, and coupon dates
a credit rating.
Includes zero coupon and deep-discounted bonds, treasury bills, perpetual bonds, convertible bonds (until the point of conversion into shares).
Includes also securities whose coupon or principal payments are backed by specific assets or by future income streams (securitisation), for example mortgages, consumer loans, corporate loans, government loans, insurance contracts, credit derivatives, future revenue.

13. Loans (F.4)
Loans normally have the following features: - A non-negotiable, unconditional debt, interest-bearing, to be repaid at maturity; - the initiative for the loan is with the borrower, while the conditions are set by the lender. They comprise short-term loans (F.41), and long-term loans (F.42).
Main types :
consumer loans
mortgage loans
commercial loans, including revolving credit facilities
overdrafts, etc.
If loans become negotiable on the open market, they are reclassified in F.3.
Short-term loans to banks are classified as F.2.
Financial leases: the lessor is deemed to make a loan with which to buy the asset. The risks and benefits of ownership are transferred to the lessee.

14. Equity and investment fund shares or units (F.5)
They represent a residual claim on the assets of the corporation or other institutional unit that issued them.
Equity (F.51) = listed shares (F.511), unlisted shares (F.512), and other equity (F.519).
Investment fund shares/units (F.52) = money market fund shares/units (F.521) and non-MMF shares/units (F.522).
Listed (quoted) shares are equity securities listed on an exchange, meaning that current market prices are usually readily available.
Other equity includes:
all forms of equity which are not shares (eg. partnership equity)
investment by general government in the capital of public corporations, in the central bank, in international organisations (except IMF)
Capital invested in quasi-corporations.
Investment funds (including unit trusts) are collective investment undertakings through which investors pool funds for investment.

15. Insurance, pension and standardised guarantee schemes (F.6)
Divided into:
Non-life insurance technical reserves (F.61)
Life insurance and annuity entitlements (F.62)
Pension entitlements (F.63)
Claims of pension funds on pension managers (F.64)
Entitlements to non-pension benefits (F.65)
Provisions for calls under standardised guarantees (F.66)
F.61: policy-holders' claims and unearned premiums.
F.63 refers to funded schemes.
F.66 Standardised guarantees are guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines. Examples are guarantees on export credits and on student loans.

16. Financial derivatives and employee stock options (F.7)
Financial derivatives (F.71) are instruments linked to a specified financial asset, indicator or commodity, through which specific financial risks can be traded.
Employee stock options (F.72): employee has the right to buy a given number of shares of the employer's stock at a stated price and time or within a stated period.
Financial derivatives are also known as secondary assets - normally no primary asset is traded.Their value derives from the price of the underlying asset (reference price).
They serve a number of purposes – risk management, hedging, arbitrage, speculation, …
Risks traded include interest rate, currency movement, equity and commodity price movement, credit risk.
Main types include:
forwards: agreement to exchange a specific quantity on a specific date
Swaps: agreement to exchange streams of payment on a notional amount of principal
Futures: traded forwards, including swaps and FRAs
Credit derivatives: trading loan and security default risk
Options: contracts giving the right to buy or sell at a predetermined price.

17. Other accounts receivable/ payable (F.8)
They are created when there is a timing difference between transactions and corresponding payments.
Trade credits and advances (F.81): claims arising from the direct extension of credit by suppliers to customers, and prepayments
Other accounts receivable/ payable excluding trade credits and advances (F.89)
Examples of F.89:
Wages and salaries
Taxes and social contributions
Dividends, rent
Purchase or sale of securities.
Interest accrued and arrears should be recorded as being reinvested in the financial asset.

18. Valuation of financial transactions
Transaction value =
Exchange value in national currency, or
Exchange value in foreign currency converted into national currency at market rate, or
If no payment is involved, value = market value of the financial assets/ liabilities.
Financial transactions and their financial or non-financial counterpart transactions are recorded at the same value.
The transaction value excludes service charges, fees, commissions, taxes.

19. Valuation in financial balance sheet
As a principle, assets and liabilities are valued at market prices on the date to which the balance sheet relates. This valuation is generally used for negotiable instruments (AF.3, much of AF.5, and AF.7).
For AF.2, AF.4, and AF.8 are to be recorded at nominal value.
Various estimation methods are acceptable for valuing unlisted shares and other equity.
Market value = nominal value + revaluations arising from market price changes.
Nominal value includes any accrued interest,and any exchange rate gains or losses.
Loans should be recorded at nominal value, regardless of whether or not they are performing. Non-performing loans should be recorded as a memorandum item at ‘fair value’ (estimated market value).
Valuation of unlisted shares and other equity should be estimated with reference to either the values of quoted shares, the value of own funds, or a discounted profit forecast, or a mixture of methods.
Defined contribution pension scheme entitlements under AF.63 are valued at the current market value of the assets invested. Amounts recorded in other AF.6 reserves and provisions are based above all on the current value of expected claims or entitlements.

20. Sector consolidation
Consolidation is the elimination of transactions or positions involving reciprocal financial assets / liabilities within a subsector, between subsectors, or between sectors.
Sum of subsectors ≠ sector
Consolidated sector data show sector as a whole in relation to other sectors.
As a general rule, accounting entries in the system should be non-consolidated. Anyway, information on counterparts is normally needed in order to produce the consolidated data.
Consolidated data are useful for particular presentations or analyses, for example, net lending / borrowing by sector.