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BOPCOM-02/45FifteenthMeetingoftheIMFCommitteeonBalanceofPaymentsStatisticsCanberra,Australia,October21–25,2002IncomefromBonds:The1993SNAApproachPreparedbytheAustralianBureauofStatisticsINCOMEFROMBONDS:THE1993SNAAPPROACHCommentsbyAustralianBureauonIMFPaperofMarch2002TheABSagreesthatthislongrunningissueneedstoberesolved.
WebelievethattheconclusionsdrawnintheIMFpaperonsomeofthecrucialissuesinthedebatearenotbasedonsoundanalysisofSNAprinciples.
TheABSarguesthatthecreditorapproachistheonethatisconsistentconceptuallywiththeSNA93/BPM5,whilethedebtorapproachisunsatisfactory.
2WeconsidertheargumentsarewellpresentedinthepaperStatisticaltreatmentofaccrualofinterestondebtsecuritiesIMFworkingpaperWP/01/132byJohnJoisceandChrisWright.
ThepaperIncomefromBonds:The1993SNATreatment-AresponsebyChrisWright(August2002)elegantlyrebutsthecriticismsmadeofthecreditorapproachintheMarch2002IMFpaper.
3Whiletheargumentshavebeenfullyaired,theABSwouldliketobrieflyreiteratethemainareasofitsdisagreementwiththedebtorapproach,withreferencetotheMarch2002IMFpaper.
SNA93treatmentofincomeflows4SNAdoesnotexplicitlydealwiththesituationofchanginginterestratesandthemeasurementofincomeflowsontradeablesecurities.
However,theIMFpaperstartsfromthepremisethatthedebtorapproachistheexistingSNAtreatment(Paragraphs4and19).
Weareoftheviewthatitisfarfromclearthatthedebtorapproachistheincumbenttreatment,andconsiderthatthecreditorapproachistheonethatisconsistentwiththeprinciplesoftheSNA93/BPM5.
Marketpricevaluation5TheSNA93hasasoneofitsunderlyingprinciplestheuseofmarketpricevaluationofassetsandliabilities.
Webelievethatthecreditorapproachisconsistentwiththisprincipleandthedebtorapproachisnot.
TheWrightpaper-IncomefromBonds:The1993SNATreatment-AresponsebyChrisWrightincludestheresultsofdeliberationsbytheJointWorkingGroupofStandardSetters(forgeneralaccountingstandards).
TheJWGclearlyarguesagainstthedebtorapproachandsuggeststhattheuseofthedebtorapproach-orintheirtermsthe"effectiveinterestbasis"-givesamisleadingpictureofinterestflowsunderafairvalue(ormarketprice)accountingsystem.
Thepapercontainstheusefulcharacterisationofthedebtorapproachasbeingconsistentwiththehistoriccostvaluationofassetsandthecreditorapproachbeingconsistentwiththeevaluationofassetsatcurrentmarketprices.
Natureofadjustmentsunderthedebtorapproach6Theapplicationofthedebtorapproachrequirestheintroductionofadjustmentsinallperiodswhentheprevailinginterestrateisdifferentfromtherateattimeofissue.
TheseadjustmentshavenomeaningunderSNA93/BPM5.
TheIMFpaperreferstotheseinparagraphs53to56andinAppendix2.
Werefertothe$8,$8,$9and$10changesshownintheexample.
WebelievethattheneedtointroduceadjustmentsthathavenomeaningunderSNS93/BPM5isnotaby-productoftheapplicationofaconceptuallycorrecttreatment,butisindicativethatthetreatmentisatoddswiththebasicprinciplesofSNA93/BPM5.
Thepaperdoesnotexplainwhattheeconomiceventswerethatoccurredintheseparticularperiodsthatgaverisetotheseadjustments.
ConsistencyofcreditorapproachwithSNA93framework7TheIMFpapermakesaclaimthattheacceptanceofthecreditorapproachwouldunderminepartsoftheSNA93framework.
ItincludesadiscussionoftheprinciplesofassetvaluationandtheassociatedincomeflowsmoregenerallywithintheSNA.
Itconcludesthattheincometoberecordedinallcasesisthatspecifiedinthecontractualarrangements.
Thisgivesinsufficientweighttothespecialnatureofbonds.
Unlikenon-financialassetsandmanyfinancialinstruments,theycanbetradedreadilyatlittlecost.
Thebondholderiscontinuallyreviewingthereturncomparedwithalternativeinvestments.
Itistheprevailingratethatthebondholderaccepts,otherwisetheywouldtradetheirholdings.
Forabondthathasbeenpurchasedinasecondarymarketthepurchaserwouldhavelittlechoicebuttoregardtheprevailingrateastheonlyapplicablerateofinterest.
IftheSNAistomaintainandapplymarketpriceprinciplesofvaluationthentheuseofthedebtorapproachisinconsistentatbestandatworstmisleading.
WebelievethatthemarketpriceprinciplesunderlyingSNAarefundamentalandthateveryattemptmustbemadetobeconsistentwiththem.
8Becauseitistheprevailinginterestratethatdeterminesdecisionsmadebybondholders,itistheprevailingratethatismostrelevantfromananalyticalperspective.
9TheIMFpaperconcludesthatbecausetheamountofinterestrecordedunderthecreditorapproachfromdifferenttothatusingtheso-calledcontractualratethenthecreditorapproachmustbeinconsistentwiththeframeworkoftheSNA93.
First,wedonotknowwheresuchaprincipleisactuallystatedintheSNA.
Second,thereareotherinstanceswheretheinterestflowsrecordedaredifferentfromso-calledcontractualinterest.
Twoexamplesaredeep-discountedbonds,whichhaveno"contractualinterest",andfinancialintermediationservicesindirectlymeasured(FISIM),where"contractualinterest"isadjustedtotakeaccountofimplicitservicecharges.
Thecreditorapproachandmonetarytransactions10TheIMFpaperappearstoarguethatthecreditorapproachisinconsistentwithrecordingmonetaryflows.
Onthecontrary,thecreditorapproachdoesrecordmonetaryflows-itissimplythattheseflowsareapportionedintoamountsreflectinginterestandamountsreflectingrepaymentofdebt.
Suchpartitioningoccursinotherareas(egtheportioningoffinanceleasepaymentsintointerestandrepaymentamounts).
Easeofcollectionandestimationofdata11Besidesbeingconceptuallycorrect,thecreditorapproachhasbenefitsintermsofeaseofestimation.
Ideally,boththedebtorandcreditorapproachesshouldbeestimatedusinglinebylineinformationoneachdebtsecurity.
Inmanycountriesthisinformationisnotavailable.
Aswithallestimationwithincompletedatasomeassumptionsarerequired.
JoisceandWright(2001)discussthisissueandconcludethattheassumptionsrequiredtoimplementthecreditorapproacharemuchmorereasonablethanthoserequiredtoestimatethedebtorapproach.
ABSexperienceconfirmsthis.
AustralianBureauofStatisticsOctober2002