INTERNATIONAL FINANCIAL MANAGEMENT

1. Dr. Mohamed Kutty
Kakkakunnan
Associate Professor
P G Dept. Of Commerce
N A M College Kallikkandy
Kannur – Kerala - India

2. Accounting Principles in BOP
 Summary of a country’s net international Transactions
 Double entry accounting principles
 For every transaction two entries must be made, one debit and
credit
 The debits will be equal to credits and the BOP will always
“balance”, setting aside errors and omissions
 Following principles can be considered as the guidelines for
accounting for BOP
1. Credit all transactions which lead to an immediate or
prospective payment form the rest of the world (ROW i.e. non-
residents), to the residents of the country which receive
payments
Or Credit items represent international receipts
2. Debit all transactions which lead to an immediate or prospective
payment by the residents of the country to the residents of the
rest of the world(ROW)
Or Debit items represent international payments

3. 3. Debit a transaction which results in an increase in
demand for foreign exchange or decrease in supply of
foreign exchange
4. Credit all transactions which result in an increase in
supply of foreign exchange or decrease in demand for
foreign exchange
Thus, an increase in foreign assets or decrease in foreign
liabilities(use of foreign exchange by residents of the
country – reduces supply or increases demand for
foreign exchange) is a debit item – capital outflow
and loan repayment etc., is a debit item
While capital inflow, receipt of loan by residents from
the ROW is a credit item.

4. Credit items (+) are funds flowing into a country
– Exports of goods and services,
– Investment income on foreign assets owned by
domestic residents,
– Transfers to domestic residents
– Net purchases of domestic assets by foreign residents
Debit items (–) are funds flowing out of a country
– Imports of goods and services,
– Investment payments on domestic assets owned by
foreign residents
– Transfers to foreign residents,
– Net purchases of foreign assets by domestic residents.

5. From the above it can be understood that
When goods are exported, there will be a credit for outflows of
goods on current account and a corresponding debit entry
for claim on a foreign company or country or increase in
foreign assets or claims of foreigners
Similarly, on imports, goods will appear on the debit side of
current account credit is given for increase in foreign
liabilities, reduction for foreign assets or outflow of funds or
claims of the country
Thus, for every debit or credit in the current account there will
be an equivalent credit or debit in the capital account and
vice versa

6.  However, in case of unilateral payments or receipts like
donations, gift, etc., there is no corresponding payment or
change in assets or liabilities position
 In this case the contra entry will be the goods outflow from
the country to the other country. Thus, always it is not
possible to match all debits will credits due to difference in
sources and timings.
 Discrepancy then arises, which necessitates a balancing
entry known as errors and omissions

7. The Balance of Payments Accounts consists of:
1. The current account balance - CA
2. The capital and financial account balance – KFA
3. The official settlements account balance - OSA

8. The Current Account balance, CA, consists of:-
1. Net exports of goods and services (NX),
2. Net income from abroad (NFP), and
3. Net unilateral transfers (NUT).
1. Net exports of goods and services, (NX):
Exports, X, (a credit item).
MINUS
Imports, M, (a debit item).
For most countries, net exports, X – M, are the
largest

9. 2. Net income from abroad (NFP):
Investment income on foreign assets owned
by domestic residents, (a credit item).
MINUS
Investment payments on domestic assets
owned by foreign residents, (a debit item)
For most countries, net income from abroad is
a relatively small part of the current account
and is about equal to net factor payments,
NFP.

10. 3. Net Unilateral Transfers (NUT)
Transfers to domestic residents, (a credit item)
MINUS
Transfers to foreign residents, (a debit item)
For some countries, net unilateral transfers are a
substantial (positive) part of the current account
The Current Account balance,
CA = NX + NFP + NUT
• When CA > 0, there is a current account surplus
More funds flowing into than out of a country.
• When CA < 0, there is a current account deficit
Fewer funds flowing into than out of a country.

11. II. The Capital and Financial Account balance, KFA:
The capital and financial account balance is the
net international transactions in existing real and
financial assets
• Real assets like real estate.
• Financial assets like stocks and bonds.
The Capital and Financial Account balance, KFA,
consists of:
1. The Capital Account balance, and
2. The Financial Account balance

12. 1. The Capital Account balance is the net flow of
unilateral transfers of assets into or out of a
Country
2. The financial account balance is the net flow of:
Net purchases of domestic assets by foreign
residents, (a credit item)
MINUS
Net purchases of foreign assets by domestic
residents, (a debit item).
Most international transactions are in the
financial account part of the capital and financial
account.

13. The Capital and Financial Account balance,
include
a). Foreign direct investment: A foreign firm
buys or builds domestic capital goods.
Increases the capital and financial account
balance.
b).Portfolio investment: Foreigners acquire
securities.
Increases the capital and financial account
balance

14. III. The Official Settlements Account balance, OSA:
Is the net transactions between central banks using official
reserve assets to make international payments in the
foreign exchange market
Official reserve assets include: Foreign government securities,
Bank deposits, and SDRs of the IMF, and Gold.
The Official Settlements Account balance, OSA is a mechanism
by which Central banks buy (or sell) official reserve assets
with (or to obtain) their own currencies
Actually the OSA is the “balance of payments”.
 The net change in a country’s official reserve assets
 The change in the domestic government’s reserve assets
MINUS
The change in foreign central bank holdings of domestic
assets.

15. • The Official Settlements Account balance,
OSA:
A balance of payments surplus means a
country is increasing its official reserve assets
A balance of payments deficit means a
country is reducing its official reserve asset

16. Valuation and Timings
 Transactions are to be recorded at their values
 Different values or prices – market prices, wholesale
prices, retail prices, cost prices etc.
 Further, for comparing the prices and BOP of different
countries there must be a uniform practice for valuation
 IMF recommends, the use of MARKET PRICES defined as
“ the price paid by a ‘willing buyer’ to a ‘willing seller’,
where the buyer and seller are ‘independent parties’
and the transactions are solely governed by commercial
considerations

17. Always it is difficult to follow these guidelines
In this case either FOB or CIF valuations can be followed
IMF recommends FOB, because the latter also include
transportation and insurance costs
In India, exports are valued at FOB and imports are valued at CIF
prices (Apte. p. 77)
Exchange rate also create problems, theoretically the exchange
rate at the time of the transaction is to be considered but, in
practice, for transactions of a month, average exchange rate for
the month is used (ibid)
Similarly time of recording the transaction also create problems
When exports and imports are to be recorded?
Uniform policy should be followed, Exports are recorded when it
is cleared by customs and imports on payment