Latest Developments in the Canadian Economic Accounts
Summary of revisions to the International Accounts of the Canadian System of National Accounts 2012
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This article is one in the series of articles which have been prepared to help users understand the changes introduced as a result of the historical revision of the Canadian System of National Accounts (CSNA), in this case focussing on the international accounts. These revisions reflect a number of conceptual and presentational changes as per the new international standards, mainly the Balance of Payments and International Investment Position Manual Sixth Edition (BPM6). They also cover classification changes and statistical revisions. Most revisions are carried back to 1981.
Balance of International Payments (BOP)
1. Current Account
Trade in goods
The goods detail is now based on the North American Product Classification System (NAPCS) back to 1981. This is now based on 263 NAPCS classes; and, from this the BOP will publish 11 aggregates plus Special transactions and Other balance of payments adjustments. Conceptually, the major change is that maintenance and repairs are reclassified from trade in goods to trade in services from 1981 forward.
Trade in services
Postal and courier services were reclassified from commercial services to transportation starting in 2004.
There were two main conceptual changes. First, commercial services now include estimates of the implicit services of financial institutions (BPM6 10.126) ─ Financial services indirectly measured (FISIM). The four components of FISIM (asset-liabilities of loans and deposits) are derived from the overall estimates generated in quarterly GDP program. Offsetting adjustments are reflected in the investment income transactions as noted below. Second, the estimation of cross-border insurance services is now presented on a net basis and is measured as the margin between premiums and claims (BPM6 10.111). This contrasts with the previous approach where cross-border premiums and claims were included gross in service receipts and payments transactions.
Statistical changes largely result from a re-design of the trade in services surveys, which expanded coverage of the survey. In the take all portion of the sample, the re-design methodology included full coverage of enterprises with large transactions and included enterprises with medium sized transactions on a rotating basis (i.e., every second year), the latter imputed in periods for which they are excluded from the sample. Broader coverage (and reduced response burden) was also achieved by the inclusion of relevant establishment-based services survey results from Unified Enterprise Survey (UES), with about 30 such surveys including questions on international trade and just over half of these including a module on international trade starting in reference year 2010. The link of the trade in services surveys to the Statistics Canada business register allowed for an upgraded methodology using a stratified sampling approach, as well as the avoidance of potential duplication in leveraging the UES surveys. Coverage of inter-company trade in services was substantially supplemented with the use of corporate income tax data (T106). The take some and take-none portions of the trade in services survey were also better represented with improved methodology. These changes resulted in upward revisions to both exports and imports over the recent time period, with exports generally revised up by more than imports. The new information from increased coverage indicated that some service components had been overstated and this led to some downward revisions, mainly in earlier periods. These revisions affect the current account balance as well as the trade balance.
This is a new BOP aggregate which includes compensation of employees and investment income.
Compensation of employees
Previously, in cases of employee - employer relationships where one was a resident of Canada and the other not a resident, the employee was treated as a business providing a service and the income flows recorded in services trade. With this revision, these flows are being recognized as the compensation of employees and recorded explicitly as such. Cross-border labour compensation flows were estimated from 1981 in conjunction with the revisions to overall estimates of employee compensation in the CSNAIncome and Expenditure Accounts. Payments are estimated mainly from T1 and T4 tax data sources. Receipts are largely estimated from counterpart data largely from the United States and the European Union.
Investment income components now align more closely with assets and liabilities in the BOP financial account and the International Investment Position. There were also some statistical revisions to both portfolio and direct investment income flows, the latter arising from the most recent annual FDI benchmark survey. Lastly as noted above, cross-border investment income flows were adjusted to remove the portion that represents services of financial institutions, which is now included in trade in services.
Some new detail was added under transfers, most notably current taxes on income and social contributions paid to or received from cross border workers (BPM6 12.28, 12.32).
2. Capital account
Changes in financial claims and liabilities arising from the change in residence of individuals are treated as other changes in the volume of assets and not as transactions in the BOP (BPM6 9.21). The capital and financial accounts were both revised to exclude these transactions.
3. Financial Account
The financial account components were modified by re-naming and restructuring the classification of assets and liabilities in the national and international accounts, affecting the functional breakdowns of direct investment, portfolio investment, reserves and other investment. Most of these modifications reflected recommended changes in BPM6, of which the major ones are noted below.
The new terminology for total transactions on assets and liabilities was introduced as Net acquisition of financial assets and Net incurrence of liabilities. In addition, the financial account balance is referred to as Net lending/net borrowing, from financial account. The discrepancy (net errors and omissions) is the difference between the Net lending/net borrowing, from financial account and the Net lending/net borrowing, from current and capital accounts.
New aggregates were also introduced as part of the main and sub tables. The total for debt securities is now available and includes short and long-term debt instruments. The sectoring of cross-border portfolio flows and positions was improved with Government debt securities now excluding instruments related to public enterprises, which are now included in the corporate sector (this sector is now broken down between public and private corporations). Official international reserves are now a separate functional category in the international accounts.
There is a notable change with respect to the sign convention in the financial account, which as per BPM6 reverses a long-standing traditional presentation of the BOP. With the use of the new terminology Net acquisition of financial assets, a plus sign in the financial account of the BOP, now refers to an increase in Canada's foreign assets while a minus sign now denotes a decrease in these assets held by Canadians.
Allocations of Special Drawing Rights (SDRs) are now recorded as increases in gross reserve assets and as increases in long-term liabilities in the BOP/IIP accounts, as per BPM6. Similarly, the gross external debt position reflects debt liabilities for all SDR allocations.
An important classification change is the termination of series based on the SIC-C 1980 classification and their replacement by those using the North America Industrial Classification System (NAICS). This was facilitated by linking the BOP survey frame to Statistics Canada's business register. New FDI flows on a NAICS basis are available starting from 2007. Inward and outward FDI positions, already available on a NAICS basis from 1999, were updated to reflect the newest vintage of NAICS.
International Investment Position (IIP)
All of the above-noted changes to the BOP financial account are carried though to the International Investment Position (IIP). In addition, there are revisions specific to the IIP and the main ones are noted below.
Specific classification, conceptual changes and statistical changes with respect to loans were implemented in the IIP. Multilateral loans to international organisations are now classified to "loan assets" in the IIP to ensure consistency with the BOP and to comply with IMF requirements. From 2003 onward, allowances were netted from loan assets. This revision extends this presentation back in time. Loan allowances are still reported separately for IMF reporting purposes. There was also a statistical revision implemented to government loan assets which aligned the IIP with the Public Accounts treatment.
The most important statistical revision relates to the assessment and improvement of geographical breakdown of portfolio equity liabilities. Data were assessed in relation to monthly flow data and confronted with estimates of the IMF's Co-ordinated Portfolio Investment Survey (now available on an annual basis starting in 2001). The analysis suggested significant under-reporting of these liabilities. As such they were revised up in the IIP. Dividend payments in investment income of the current account of the BOP were correspondingly revised up.
The largest change to the IIP is a result of the estimation of market values for foreign direct investment positions (FDI) ─ that is, cross-border inter-company equity, both listed and unlisted (BPM6 7.15-19; and OECD Benchmark Definition of Foreign Direct Investment, Fourth Edition, 291-304). The overall approach to convert FDI book value estimates to market value largely involves the use of market capitalization ratios (market-to-book values) derived from similar listed companies (on an industry basis). These ratios are applied to book value equity estimates of unlisted companies, with exceptions for specific cases (i.e. small companies, specific sectors), to generate the corresponding market valuation. For this historical revision, FDI asset-liability equity positions were converted to market value for use in the quarterly IIP back to the first quarter of 1990. It should be noted that the annual FDI estimates with detailed geographical and industry breakdown, will remain at book value for the time being.
These new FDI estimates are combined with existing estimates of cross-border portfolio investment positions at market value to provide a complete IIP at market value. With this change, revaluations of assets-liabilities are fully reflected in Canada's quarterly external position, as the effect of unrealized capital gains or losses is now combined with write ups/downs and foreign currency revaluations. The market value estimates for the IIP will now be the focus of the quarterly release, though the book value estimates remain as secondary tables and as the link to the detailed annual FDI estimates.
CSNA12 represents the most substantial change to the international accounts of the Canadian System of National Accounts since 1997. This update provides users with the most up to date portrait of the Canadian economy's cross-border transactions and positions. This revision reflects new classification systems, improved estimates and details and a presentation that aligns with international standards. In the future these types of revisions will be undertaken on a more frequent basis, to ensure continued relevance and international comparability. The next historical revision is planned for 2014.
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