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Appendix 4 Explanation of the variables in the financial accounts

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Financial instrument classes

The scope of the tables is restricted to financial assets and liabilities: in other words, fixed assets and intangibles are not included, except when they are held by residents abroad or by non-residents in Ireland (see AF.5 below).  The financial instrument classes distinguished are as follows:

AF.1 Monetary Gold and Special Drawing Rights (SDRs).  Monetary gold (AF.11) includes all gold which is not intended for industrial purposes and not held in the form of valuables. Special drawing rights (SDRs) (AF.12) consist of the international reserve assets created by the IMF. Together these instruments form part of the official external reserves held by the Central Bank of Ireland.  In the financial accounts statistics Gold is recorded only on the assets side of the table, as it is not considered to be the liability of any sector. 

AF.2 Currency and Deposits.  This category includes currency (AF.21), consisting of notes and coins in circulation which are commonly used to make payments. As a liability, this item only exists for general government (issuing of coins), monetary financial institutions (Central Bank of Ireland issuing of bank notes) and the rest of the world (foreign currency). The asset is shown in the sector which is the holder of the currency.

The category also includes transferable deposits (AF.22), i.e. deposits that are immediately convertible into currency or transferable without restriction; and all other deposits (AF.29).  Both are shown as an asset of the holder and the liability only exists for the deposit-taking sectors - mainly monetary financial institutions, but also the rest of the world and general government in respect of small savings schemes.

AF.3  Securities Other Than Shares.  This category covers Debt Securities other than Equities  which includes both Short-Term (AF.31) and Long-Term (AF.32). Short-term are all securities with a maximum term of one year.

AF.4 Loans. This category covers all credits which do not have the characteristics of deposits. Loans granted to monetary financial institutions are, by definition, included in the deposit category (AF.2). Short-Term Loans (AF.41) have an original maturity of up to one year or are repayable on demand. Long-Term Loans (AF.42), i.e. loans with an original maturity of more than one year, mainly include mortgage loans and long-term consumer credit.

AF.5 Shares and Other Equity.  These are claims which are fully or partly entitled to a share in profits of a corporation or to a share in net assets in the event of liquidation. The category includes shares (AF.51), both quoted (AF.511) and unquoted (AF.512), and other forms of equity (AF.519).  Other forms of equity include cross-border investments in unincorporated businesses (branch operations) or fixed assets (such as property).  Shares and Other Equity also include shares in mutual funds and similar types of collective investment scheme (AF.52).

AF.6 Insurance, Pension and Standardised Guarantee Schemes includes non-life insurance technical reserves (AF.61), life insurance and annuity entitlements (AF.62), pension entitlements (AF.63), claims of pension funds on pension managers (AF.64), entitlements to non-pension benefits (AF.65) and provisions for calls under standardised guarantees (AF.66).

AF.7 Financial Derivatives and Employee Stock Options covers derivatives (AF.71) and employee stock options (AF.72). Employee stock options are agreements under which an employee has a right to purchase shares of their employer’s stock at a stated price under an agreed timeframe.

AF.8 Other Accounts Receivable/Payable.  This covers trade receivables and payables (AF.81) and all other financial assets and liabilities (AF.89).

BF.90 Net Financial Assets.  This is calculated as total financial assets less total liabilities. Since it excludes non-financial assets (property, equipment, durable goods, intangible non-financial assets etc), it is not a measure of net worth.

B9.F Net Financial Transactions. This is calculated as the total net transactions in financial assets less the total net transactions in liabilities.  In principle it should equal the net lending/borrowing(B.9) item from the non-financial accounts. However, as a consequence of using various sources, statistical discrepancies between B.9 and B9.F will generally occur.

 

Interpreting the balance sheets of the financial sectors

The significant involvement of Irish companies, such as banks and other financial companies, in international financial transactions (sectors S.124 and S.125+S.126+S.127 in particular) tends to result in those entities having very large foreign assets and liabilities relative to other measures of the economy, such as GDP (This is in contrast to other economies which engage less heavily in international financial transactions).  In most cases the foreign liabilities of a given sector are, to a large extent, offset by foreign assets, so that the net foreign position of that sector is not out of line with corresponding sectors in a similar economy.

 

Valuation principles in the financial accounts

In general, balance sheet positions are reported at end-year market value where they are available or can be estimated, and transactions are reported at the actual value of the transaction.  This applies in particular to marketable securities (AF.3 and part of AF.5) on both the assets and liabilities sides.  However, unquoted equity assets and liabilities (part of AF.5) are in general reported at book value.  Foreign assets and liabilities are reported in general on the same basis as in the CSO’s International Investment Position statistics.  The liabilities under Insurance Technical Reserves of life insurance companies and, especially, pension funds (and the corresponding assets of policy holders and fund members) are estimated primarily from the values of the assets of the companies and the funds, and are not based on the actuarial liabilities to policy holders and fund members.

 

The values reported for the net financial assets of each sector must be assessed in the light of these differences in valuation practice.  Firstly, the absence of estimates of the non-financial assets, such as property, means that the net financial assets can not be taken as an estimate of the net worth of the sector.  For the household sector, for example, the net worth will clearly be much larger than the (positive) net financial assets, as much of the wealth of households is invested in property and durable goods.  This is also true, but to a proportionately lesser extent, for the corporate sectors, especially for the non-financial corporate sector.  In general, for these corporate sectors, the net financial assets are typically negative, partly for this reason, but an additional factor must also be taken into account.  The net financial assets of a company as reported in these results will be negative to the extent that the market value of its shares, if this is what is used in the account, exceeds the net asset value as reported in its balance sheet.  For the majority of indigenous non-quoted companies the equity liability is captured essentially on the basis of their net asset value as reported in their balance sheet.

 

Consolidation

Tables 2 and 3 are given on a non-consolidated basis for both sectors and sub-sectors.  In other words, a liability of a unit in a sector to another unit in the same sector or sub-sector (such as a deposit received by a bank from another bank) is reported in the liabilities table for the sector of the reporting unit and in the assets table for the lending sub-sector and sector (in this example, in the tables for S.122+S.123 and S.12).  A consequence of this is that the aggregate sector S.12 (financial corporations) and the groupings of sub-sectors within S.12 (S.122 + S.123, and S.125 + S.126 + S.127) are also not consolidated.  The results for S.1 (total economy) are by definition not consolidated; in other words, the entry for any instrument for S.1 is the arithmetic total of the sectors S.11, S.12, S.13 and S.14/15.

 

Tables 4 and 5 give the accounts on a consolidated basis which means the transactions or positions which occur between units within the same sector of the economy are eliminated. In the example used in the previous paragraph, the deposit received by a bank from another bank will be excluded from sector S.122+S.123 in both the assets and liabilities table. Each sector/sub-sector (S.11, S.121, S.122+S.123, S.124, S.125+S.126+S.127, S.128+S.129, S.13 and S.14/15) is given on a consolidated basis but it is important to note that the overall S.12 total is not fully consolidated and therefore the aggregate S.12 is not the arithmetic sum of its consolidated sub-sectors.

 

Data sources and compilation of the financial accounts statistics

Financial Accounts statistics are in general compiled by assembling and combining statistics drawn from other primary published and unpublished sources. The main sources currently used are the CSO Balance of Payments and International Investment Position statistics including the underlying surveys, and published Central Bank statistics, primarily money and banking statistics.  Other sources used include government administrative and statistical records, including those of state-owned companies and accounts filed with the Companies Registration Office and the statistical reports of representative bodies.

 

The first phase of compilation involves assembling from these sources the asset and liability positions of each sector for each instrument class at the end of each year and, as far as possible, the net transactions in the year.  Where transactions estimates are not available in the primary source, estimates are made by removing from the change in position the estimated effect of revaluations, due for example to price movements in securities, or to exchange rate movements in the case of items denominated in foreign currencies.  In the early stages of the work, the positions and transactions are then further allocated to the extent possible to counterpart sectors, based on original information or on preliminary allocation proportions. For many cells in the tables this process yields two estimates, one from each side, for example deposits of government with resident banks, reported as claims on banks in the government statistics and as liabilities to government in the banking statistics.  Almost invariably the two estimates differ to some extent, because of differences in such factors as coverage, valuation and timing. Furthermore, for many other cells, only a single-sided estimate is available.  This is the case in particular for the Household Sector, for which no direct or primary data are available, and which must be compiled entirely on the basis of counterpart data and estimations.

 

In the second phase, discrepancies are identified and the tables are balanced.  This is done by a mixture of mechanical and judgemental processes to bring about compliance with several accounting identities and conventions.  A key requirement is that the sum of all holdings by residents and non-residents of financial assets of a given class should be equal to the sum of all liabilities of that class (also by residents and non-residents).  In this operation, priority is given to retaining, as far as possible, consistency with other well-based statistics such as official banking and International Investment Position and Balance of Payments statistics, and government financial statistics.  Some of the imbalances that come to the surface inevitably therefore get allocated to sectors or instruments for which the primary statistics are less well based, particularly S.125+S.126+S.127 (other financial intermediaries) due to its relatively large size.

 

Annual financial accounts, published by the CSO, and quarterly financial accounts published by the Central Bank, show differences across the sectors of the economy. These differences arise from the classification and revision practices adopted by each institution following the introduction of ESA 2010. Both institutions are working closely to ensure a consistent approach in future publications.

 

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