BPM Redeemable bonds

							INCOME

  Returns to factors of production:
        Labor (and human capital)
        Capital (financial, entrepreneurship)
        Land (and other nonproduced assets)
1. Income - General
    Distinguished from:
        Payments for goods and services
             Economic process – products vs. income generated
             Payments to producers for goods and services; payments
              by producers to those who have provided factor inputs
             Payment to employee vs. service contract
             Note “nonfactor services” and “factor services” in BPM4
        Transfers
             Quid pro quo
        Payments for financial assets
        Holding gains and losses (are an important return
         to capital and a substitute for income)
1. Income - General

    N.B.: Difference between Use of
     (Produced, Tangible) Capital and
     Returns to (Finance) Capital
      Use of Produced, Intangible = Service
      Return = Income (through Financial
       Asset/Account)
      Use of nonproduced, nonfinancial,
       intangible assets (patents, franchises) gives
       rise to service
2. Income – Compensation of
Employees
    Income derived from supply of labor
        Wages, salaries, contributions to pension
         funds, other benefits (cash and in kind)
         BPM5 para. 269.
2. Income – Compensation of
Employees
    Income derived from supply of labor
        Residence status of employee and
         employer
           Nonresidents employed in economy (examples:
            temporary workers, border workers, foreign
            students, travelers)
           Local staff of embassies

           All staff of international organizations

        Employment status of recipient (employee
         only; independent contractor is service)
2. Income – Compensation of
Employees
    Gross recording of employees’ income
      Taxes paid by nonresident employees are
       current transfers (para. 271)
      Local expenses of employees are Travel
       (para. 271) or Government Services n.i.e.
       (para. 266)

    Compensation of Employees vs.
     Workers’ Remittances (transfers)
2. Income – Compensation of
Employees
 Example (Guide para.
   578)                 Country of   CR.   DR.
                        employment
   Works three months   Travel
   and earns $500,
                        Comp of
   pays income tax      employees
   $120, gets free      Current
   accommodation        Transfers
   worth $100,          ???
   consumes $200 of
   food and clothing.
2. Income – Compensation of
Employees
    Poorly measured
      Nonpermanent workers a growing
       phenomenon, making borderline cases
       between residents and nonresidents more
       numerous.
      Practical issues: hard to capture
       transactions (turn to immigration and
       demographic statistics, average earnings,
       taxes, expenditure). See Forms 11 and 14
       in the Guide.
3. Income – Investment Income

    Property Income:
     “The income receivable by the owner of
     a financial asset or a tangible non-
     produced asset in return for providing
     funds to, or putting the tangible non-
     produced asset at the disposal of,
     another institutional unit.” (1993 SNA
     para. 7.88)
        BPM5 calls “investment income”
3. Income – Investment Income

    Debt instrument gives rise to interest
     income. Binding agreement to repay.
    Equity gives rise to dividends. (Direct
     investment also gives rise to reinvested
     earnings.) No binding agreement to repay.
            BPM5 para. 274
 Standard components emphasize functional
   split:
   Direct, Portfolio, Other (also Reserves)
4. Income – Dividends

    Coverage (para. 290):
      Bonus shares and stock dividends excluded
       (not a transaction)
      Liquidation dividends excluded (withdrawal
       of capital – financial account)

    Timing (para. 282):
        On date payable
            (accrual of underlying profits unclear)
4. Income – Dividends

    Valuation (para. 287):
        Gross of taxes (taxes are current transfers)


    Timing (para. 282):
        On date declared payable
             Relationship to accrual of underlying profits
              unclear (not necessarily related to earnings)
5. Income – Reinvested Earnings

    Imputed transaction (equal and opposite
     entry in financial account)

    Incorporated or branch - same

    Timing
        As the income is earned (para. 283)
5. Income – Reinvested Earnings

    Valuation (paras. 285-9)
        Net operating surplus - net property income
         payable – dividends payable to owners – taxes
         payable (BPM5, para. 286).
        Excludes effect of holding gains/losses, write-offs,
         bad debts, provisions.
        Use current cost valuations (inventories,
         depreciation)
        Possibly negative.
        Prorated on ownership share.
    Equal and opposite entry in the financial
     account.
6. Income - Interest

    Accrual basis:
        Payable means when it is earned, not when it’s
         due.
        Not coupon.
        Deep discount (also other discounts and
         premiums).
        Calculating interest on bonds: accrues over whole
         life of the bond.
        If interest not paid, entries for accrued interest are
         required (income and financial account).
6. Income - Interest

    Debate on application of accrual
     principle to interest on bonds (not
     deposits and loans):
      “Debtor” (contractual amount)
      “Creditor” (market yield)

      “Acquisitions” (asymmetric)

    Debtor approach adopted by ISWGNA
6. Income - Interest

  Financial leases – interest is imputed
   (BPM5, para. 206)
  Problems of identifying interest on
   securities in ITRS when security is
   traded frequently.
  Possibility of FISIM – interest includes
   service charge to financial intermediary.
  Valuation net of taxes (BPM5, para. 287)
6. Income – Interest

    Example 1 – Difference between cash, due for
     payment, and accrual bases
        Six monthly interest payment of 20; payment in Q2
         is delayed to Q3.

     For each of cash, due for payment, and accrual,
     what is:        Interest paid?
                     Arrears owed?
                     Interest accrued (fin account)?
                     Cash?
6. Income – Interest

    Example 2 – Deep discount and market
     value
        Security with nominal value of 100, sold for
         80, redeemable in two years.
          What is:    Interest?
                      Market value of security?

             What if the interest rate changes?
                  Note: holding gains and losses.
7. Income - Other

    Income imputed on pension funds, life
     insurance, and insurance technical
     reserves
7. Income – Other Property Income

    Land and nonproduced assets:
        Examples: rent of land for military base, use of seas
         for fishing, use of part of broadcasting spectrum,
         use of internet domain names, mining rights.
        Not explicit in BPM5, included in other investment
         income.
        Sometimes unclear if payment is for purchase of
         asset (capital account) or use (income account),
         e.g., five-year logging rights.
8. Income – Data Collection

    Survey
        Guide, Form 12 (note instructions on pages
         333 and 335)
  ITRS
  Estimation
        Models – see Guide, paras. 598-601