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Balance of Payments Conceptual framework RESIDENCE The Balance of Payments registers the transactions between the residents of one country and those of the rest of the world, independently of their nationality. The IMF considers an institutional unit to be a resident unit when it has a centre of economic interest in the territory of the country. A company has a centre of economic interest and is a resident unit of a country when it produces a significant amount of services in the said country or possesses land or buildings located in it. In practice, the IMF recommends the pattern of remaining in the country for one year or more to be considered a resident. MOMENT OF REGISTRATION OF THE TRANSACTION: ACCRUAL PRINCIPLE In the Balance of Payments, transactions must be registered in accrued values. Using IMF terminology, this means that they must be registered with reference "to the moment at which an economic value is created, transformed, exchanged, transferred or extinguished". Thus, the flows collected need not coincide with the liquid received effects or payments generated. In fact, on numerous occasions, the transactions of the Balance of Payments do not yield liquid received effects or payment and, on others, their registration takes place at a different time. In practice, the application of this principle to all operations with non-residents is difficult and costly, and therefore, many transactions are registered at the time of received effect or payment origin. VALUATION. FLOWS AND STOCKS As of 1999, the Spanish Balance of Payments is prepared in euros. The transactions are stated in their original currency, having used the ten-yearaverage exchange rate for their conversion to euros, in the case of operations declared by financial institutions, and using the monthly average for the rest. This is a quite precise approximation of the theoretical valuation principle referred to in the Fifth Manual of the IMF, which states that all transactions must be valued at the market prices that are valid on the date of the operation. The estimations of the different headings of the Balance should not refer to variations caused by the fluctuations in the exchange rates or in the market prices of the different financial assets or liabilities. Nor should the Balance of Payments account for the differences that might arise on valuing, in a common currency, the received effects and payments of compensation or sale of currencies that are identical, by definition, to the original transaction agreed on by the parties to the operation. This valuation criterion is fundamental for understanding the relationship between flows and stocks, in other words, the relationship between the Balance 1 of Payments and the International Investment Position. The Fifth Manual defines the International Investment Position as the value of the stock of each of the financial assets and liabilities defined in the normalised components of the Balance of Payments. For each normalised component of the financial account, the International Investment Position must reflect the value of the stock of that type of asset or liability, at the beginning of the year, and its value at the end. The difference between the two values should be the same as the sum of the transactions actually carried out with those assets and liabilities, plus the variation of the value of the stock caused by alterations in the exchange rate, plus that caused by the variations in the price of the corresponding assets or liabilities, in addition to other different adjustments. ORGANISING THE FINANCIAL FLOWS REGARDING THE VARIATION OF ASSETS AND THE VARIATION OF LIABILITIES. SIGNS USED The operations of the financial account are accounted for as the net variation of the assets or the net variation of the liabilities of the resident units as compared to the non-resident units. The data collect only net asset flows (acquisitions of assets by residents as compared with non-residents, minus sales and depreciation) and net liability flows (acquisitions by non-residents of assets issued by residents, minus sales and depreciation). The annotation signs of the Balance of Payments require an accounting convention. Even in the case of current account transactions, the sign could be different, depending on whether trying to note the perspective of the resident or that of the non-resident involved in the operation. In the Balance of Payment in Spain, the perspective of the resident is used. In the financial account, this accounting convention by itself would not be sufficient to define unequivocally the phenomenon that must therefore be reflected in each chart detailing the accounting convention used. The Errors and Omissions heading is a mere adjustment of the difference between the total received effects and the total payments. If the sign is positive (negative), this means that there is an undervaluation (overvaluation), due to errors or omissions of the net balance of the current account plus the capital account, that is, the nation's financing capacity or need, as related to the net balance of the financial account. Classification of the operations by heading and institutional sector CLASSIFICATION BY HEADING The operations of the Balance of Payments are organised around three basic accounts: current, capital and financial. Current Account: specific notes for each heading 2 Subdivision into four balances: goods, services, income and transfers. • Trade balance This heading includes both goods that cross country borders and those others whose trade is carried out without the physical transfer across them. This also includes the supply of goods, both of fuel and of any other type, to means of transport. • Tourism and travel This heading includes the goods and services acquired in an economy by travellers residing in another economy, who travel for business or personal purposes -- including health and education --, with stays shorter than one year. • Transport The transport heading includes both charters and passage and auxiliary services. The supply of fuel and other goods, which are accounted for in the trade balance, are excluded under this heading. Crewed chartered travel is included. • Communications This heading accounts for the post and courier services, those related to the transmission of sound, image, telex and fax, telegram, cable, radio broadcasting, satellite communication, electronic mail, etc. • Construction The construction services data have been obtained based on a precise definition of the concept of residence of the companies involved, to define, in accounting for the operations of this nature, those that may be registered specifically as construction services and those that should appear as flows between companies related by direct investment links. • Insurance Insurance services include the estimations provided by the National Accounts regarding the value of the service itself. In addition to commercial insurance, this section includes life insurance, pension fund contributions, personal accident insurance, health insurance, vehicle accident insurance, etc., and activities auxiliary to insurance and pension funding. Social Security benefits and contributions, which are registered in the balance of transfers, are excluded. Export credit insurance is also excluded, already accounted for under the Financial Services heading. • Financial Services This heading includes the broad range of financial intermediation services. This includes commissions and expenses related to foreign investment, such as the issue, placement, redemption and amortisation of shares, the intermediation commissions in direct or portfolio investments or the sale of buildings, the commissions and expenses related to obtaining and placing funds in deposits, 3 transfers, check payment and approval, currency exchange, travellers' checks, etc. Received affects and payments associated with the principal and the returns from the mentioned operations, accounted for in the financial and income balances, are excluded. • Information technology and information services Register the received effects and payments for hardware services, understanding as such those corresponding to consultancy and the configuration of information technology equipment, including their maintenance and repair; software services, such as those involving their development and fine tuning, including the analysis, design, implantation, documentation and system maintenance; information services, such as those of news agencies, reports, etc.; automatic data processing, including recording, change of support, etc., and, in general, database services. It is appropriate to warn that this heading does not include the purchase of general -- non-bespoke -- software packages, nor training services, which are included under the heading of Other services provided to companies. • Services provided to companies In addition to commercial and operative leasing services, this heading includes, under the generic denomination Other services provided to companies, a broad range of transactions of this type that cannot be considered within other concepts. • Personal, cultural and recreational services This heading encompasses audiovisual services and the group of personal, cultural and recreational services. Among the audiovisual services, this includes the production of films and radio and television programs, and the right to their distribution granted to the mass media; this also includes the remuneration of actors, producers, etc. It excludes the granting of rights, by the authors themselves, of films, recordings of musical pieces, books, etc., which are registered under the heading of Royalties and income from intangible property. The section regarding Other cultural and recreational services registers the received effects and payments derived from services of this nature that are not included under the previous heading, such as theatres, museums, libraries, sports, etc. This heading accounts for subscriptions to newspapers and periodical publications. • Government services Group the received effects and payments linked to the expenses of embassies, consulates, military units, etc., and the expenses related to the provision, by the Spanish government, of health and education services, administrative expenses, tourism offices, educational institutions, etc. • Royalties and income from intangible property This heading registers the received effects and payments of exploitation rights of patents, trademarks, models and inventions, as well as copyrights. The rights 4 derived from the distribution of films and audiovisual materials, which are accounted for under the heading of services designated with that name, are excluded. • Work income Includes the remuneration of border, seasonal and temporary workers. The heading data include, starting in 1995, the social contributions and direct taxes of the remunerations received (paid) by (to) resident (non-resident) workers. • Investment income Investment income is presented with the same breakdown by instrument as those corresponding headings from the financial account, accounting for the income generated by each asset and liability considered therein. • Current transfers According to the IMF, first of all, a transfer in kind is a transfer of capital when it involves: a) the transfer of ownership of a fixed asset or b) the debt forgiveness of a liability by a creditor without receiving a counterpart in exchange. Secondly, a cash transfer is a transfer of capital when it is linked to or conditioned by the acquisition or transfer of a fixed asset by one or both parties to the transaction. A transfer of capital should cause a variation of the same magnitude in the holdings of assets of one or both parties to the transaction. Current transfers comprise all those that are not transfers of capital. They directly affect the level of disposable income and should influence the consumption of goods or services; they reduce the possibility of income and consumption of the donor in that they raise the possibility of income and consumption of the beneficiary. Capital Account: specific notes for each heading Capital accounts include capital transfers and the acquisition and disposal of non-financial non-produced assets. In the case of Spain, capital transfers are, by far, the most important heading in this account. • Capital transfers Capital transfers in the private sector mainly include those movements of funds that are generated by the liquidation of the capital gains of emigrants or immigrants, including changes in the ownership of their assets and liabilities, upon their changing residence. The coverage of these operations, given the information collection system of the Spanish Balance of Payments, is incomplete. The quantitatively most important part of this heading is that which considers the income through capital transfers of the Public Administrations with the EU. Among these, it is worth noting the funds for regional development (FEDER) and the so-called "cohesion funds". Funds originating from the European Agriculture Guidance and Guarantee Fund (EAGGF) are also included. In addition, in accordance with Eurostat guidelines, the indemnities paid by the Spanish Export Credit Insurance Company (CESCE) for risks assumed by the 5 company on behalf of the Spanish Treasury, are being registered as payments in capital transfers of the Public Administrations. • Acquisition of non-produced intangible assets This heading considers the transactions related to tangible assets that might be used or needed for the production of goods and services, but that in themselves have not been produced -- for example, land and subsoil resources --, and the transactions related to non-produced intangible assets -- for example, patents, copyrights, trademarks, concessions, etc., and leases or other transferable contracts --. Nevertheless, in the case of land transactions -- including subsoil resources -- between residents and non-residents, all acquisitions/transfers are considered to take place between resident units, and the non-resident is considered to acquire a financial asset as compared to a hypothetical resident unit. The only exception is the purchase or sale of land by an embassy, when the operation involves the transfer of the asset of an economic territory to another. In these cases, the transaction of land between residents and non-residents is registered as the acquisition/transfer of non-produced non-financial assets. Financial Account: specific notes for each heading Financial accounts have been structured in such a way that the operations of the Bank of Spain have a separate treatment, considering one account with the operations of the different sectors, excluding the Bank of Spain, and another account with the operations of the Bank of Spain. Within the first account , four balances are offered, differentiated by the type of assets and liabilities in which the corresponding operations are carried out: direct investments, portfolio investments, other investments and financial derivatives. The first three offer separate information on asset and liability operations, while the financial derivatives are accounted for as a variation of liabilities minus a variation of assets. The assignation of operations to the different institutional sectors is carried out in accordance with that pertaining to the resident owner of the operation. Institutional sectoring is also used in the balance of investment income. • Direct investments Include those reflecting an investor objective of obtaining a permanent profitability in the company in which they invest, reaching a significant degree of influence over their management bodies. The practical rule specified in the Fifth Manual defines 'direct investor' as the owner of 10% or more of the capital of the direct investment company. In addition, the Direct investment heading must include not only the flows of the original transaction by which the condition of direct investor is established, but also all subsequent financing flows, whatever there nature may be, both in the form of new acquisitions of shares, bonds and debentures, and in those carried out through commercial or financial loans of any term. • Portfolio investments 6 Include transactions in negotiable shares, excluding those which, materialised as shares, fulfil the requirements to be considered as direct investments. These do not include financial derivatives, even if they are negotiable. This balance is divided into three main components: shares, bonds and debentures and instruments of the monetary market. • Other investments Include operations of loans -- commercial and financial --, separating the short and long term, and the operations of deposits, including foreign currency holdings. • Financial derivatives Include all instruments of this nature that may be valued because a market price exists for the core asset, independently of whether it is negotiated or not, in organised markets, and independently of what the core asset is. • External operations of the Bank of Spain Include the variation in the reserves, the variation in the account of the Bank of Spain with the Eurosystem and the remaining assets and liabilities external to this institution. CLASSIFICATION BY INSTITUTIONAL SECTOR The balance of investment income and the different headings of the financial account are subdivided into the three following institutional sectors: 1. Monetary Financial Institutions Sector 1.1 Bank of Spain 1.2 Other monetary financial institutions 2. Public Administrations Sector 2.1 Central Administration 2.2 Autonomous Communities 2.3 Local Corporations 2.4 Social Security Administrations 3. Other Resident Sectors Sector 3.1 Non-monetary financial institutions, except insurance and pension fund companies 3.2 Insurance and pension fund companies Public and private non-financial companies Non-profit households and institutions, NPIs serving households 3.3 3.4 The assignation of operations to the different institutional sectors is carried out in accordance with that pertaining to the resident owner of the operation. 7