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«An IAG reference document Consolidation and corporate groups: an overview of methodological and practical issues Prepared by a task force of the ...»

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Inter-Agency Group on

Economic and Financial

Statistics

An IAG reference

document

Consolidation and

corporate groups: an

overview of methodological

and practical issues

Prepared by a task force of the Inter-Agency Group on

Economic and Financial Statistics

October 2015

Contributors to the work of the IAG task force 1

This work was led and coordinated by the Bank for International Settlements (BIS), chair of the IAG

task force.

BIS Stefan Avdjiev Christian Dembiermont Blaise Gadanecz Branimir Gruić Patrick McGuire Swapan Kumar Pradhan Paul Van den Bergh Philip Wooldridge Bruno Tissot (IFC Secretariat) Basel Committee on Banking Supervision (BCBS) Marie-Céline Bard Xavier-Yves Zanota European Central Bank (ECB) Anna Agresti Patrick Sandars Financial Stability Board (FSB) Pietro Franchini Stéphane Mahieu Richard Thorpe International Association of Insurance Supervisors (IAIS) Catherine Lezon International Monetary Fund (IMF) Evrim Bese Goksu Robert Heath Organisation for Economic Co-operation and Development Maria Borga (OECD) Peter van de Ven United Nations Statistics Division (UNSD) Benson Sim This publication is available on the BIS website (www.bis.org) and on the IAG website (www.principalglobalindicators.org).

© Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated.

ISBN 978-92-9197-280-7 (print) ISBN 978-92-9197-281-4 (online) The views expressed in this document reflect those of the contributors and are not necessarily the views of the institutions they represent.

–  –  –

Contributors to the work of the IAG task force

Introduction

1. Complementing the residency-based approach of the national accounts to assess financial positions

2. Assessing financial positions on a globally consolidated basis

3. Classification of economic units

Box A: Classification of financial corporations in institutional sectors

4. The concept of control

Box B: OECD statistics on Multinational Enterprises (MNEs) and Foreign Direct Investment (FDI)................ 20 5. The concept of the corporate group

6. Consolidation of intragroup positions

Box C: Examples of consolidated data sets in the European Union

Box D: Comparison of sectoral and global consolidation of financial positions

7. Examples of consolidation and potential challenges

Box E: The IMF’s FSI guide as a basis for consolidation practices

8. Looking ahead

References

–  –  –

Background In 2009, the International Monetary Fund (IMF) and the Financial Stability Board (FSB) prepared a report entitled The Financial Crisis and Information Gaps to explore information gaps and provide appropriate proposals for strengthening data collection. The proposals were subsequently endorsed by the G20 Finance Ministers and Central Bank Governors (IMF and FSB (2009)).

A number of the report’s 20 recommendations specifically address the general issue of international network connections. Among them, Recommendation #13 relates to a simple type of connection, namely cross-border exposure. It asks “The Inter-Agency Group on Economic and Financial Statistics (IAG) to investigate the issue of monitoring and measuring cross-border, including foreign exchange derivative, exposures of nonfinancial, and financial, corporations with the intention of promoting reporting guidance and the dissemination of data”.

The report also provides some background information on the reasons for Recommendation #13 (IMF and FSB (2009), p 21): “The crisis has highlighted the lack of data on crossborder exposures of nonfinancial corporates. ‘Onshore’ corporates, both financial and nonfinancial, used offshore entities to raise finance and provide implicit guarantees, and this was unknown to policy makers.

In some emerging markets, authorities were unaware of significant corporate exposure to exchange rate derivative products because these were booked outside of their jurisdictions. For instance, small and medium firms that were highly concentrated in exporting businesses in some instances acquired foreign exchange exposures through derivatives contracts booked on foreign markets. Data deficiencies were mostly in relation to cross-border transactions. While some guidance exists to identify such cross-border exposures – such as the “ultimate risk” measures of the BIS’s consolidated IBS data and as set out in the TFFS’s Guide on External Debt Statistics, and Table 6.4 in the Financial Soundness Indicators Guide to identify derivative exposures – a more comprehensive approach is needed. Work in this area will need to address the methodological and practical issues of handling the concept of consolidation and the definition of corporate groups.”

In essence, Recommendation #13 highlights three major points:

(i) The need to investigate the exposures of non-financial corporates associated in particular with cross-border transactions, and to address the related data deficiencies.

(ii) The importance, as a starting point, of addressing the methodological and practical issues of managing the concept of consolidation and the definition of corporate groups.





(iii) The promotion of the existing guidance to identify cross-border exposures and the dissemination of the data collected and compiled in the context of: the BIS’s consolidated International Banking Statistics (IBS), which in particular rely on measures of “ultimate risk”;

The IAG is composed of senior officials of the statistical functions of the BIS, the IMF, the ECB, Eurostat, the OECD, the World Bank and the UN (see www.principalglobalindicators.org). A dedicated task force of the IAG, chaired by the BIS, was set up to advance the implementation of Recommendation #13.

The importance of this issue was subsequently reinforced in the April 2014 Communiqué of the G20 Finance Ministers and Central Bank Governors: “We ask the IMF, FSB and BIS to advance work (…) to address data gaps involving foreign currency exposures, building as far as possible on existing statistical and data initiatives to better assess cross-border risks.” See www.g20australia.org/official_resources/communiqu%C3%A9_meeting_g20_finance_ministers_and_central_bank_governors_washington.

Perspectives on Consolidation Concepts 1 the Task Force on Finance Statistics’ (TFFS) external debt statistics; and the statistics based on the IMF’s Financial Soundness Indicators (FSI) Guide – see IMF (2006).

Recommendation #13 is clearly linked with many other recommendations included in the Data Gaps Initiative (eg on international investment position, securities statistics, financial sectoral accounts, banking statistics). Also of particular interest is the G20 initiative to promote a Legal Entity Identifier (LEI) for all corporations, which would represent a key step in facilitating the identification of individual institutional units and their control relationships across the world (see Section 7). Indeed, the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) has just published a consultation document on this issue (LEI ROC (2015)), proposing an incremental approach to collecting data on direct and ultimate parents of legal entities in the Global LEI System, based on accounting definitions as a starting point.

Aim of this report As regards the guidance provided by existing statistical exercises, the BIS’s consolidated IBS data refer to the so-called nationality-based approach, whereas the external debt data predominantly follow the residency-based methodology of the 2008 System of National Accounts (European Commission et al (2009)), and the statistics outlined in the IMF’s FSI Guide are mainly based on international accounting standards. It is therefore challenging to integrate statistical data based on these various methodological concepts in a useful way.

The IAG task force’s view is that a key precondition for addressing Recommendation #13 is clarifying the main issues at stake. That means describing the basic elements of the various existing methodologies, such as the concepts of residency, institutional unit, group, control, aggregation and consolidation as outlined in the Recommendation’s action plan. Such clarification may help to enhance the understanding and the comparison of the various data collected, which cover different domains – eg financial accounting, national accounts, financial supervision. These data can differ significantly – in terms of eg granularity, frequency, timeliness, product type, coverage and consolidation concepts. The clarification pursued should thus facilitate the use of these data by policymakers, especially by macroprudential authorities and others involved in the monitoring of financial stability issues.

The objective of this reference document is therefore:

(i) to take stock of the methodologies of the various statistical systems in use, especially as regards the definition of corporate groups (including banks and financial groups), the consolidation concepts adopted, and the comparability of the various existing data sets;

(ii) to suggest some methodological and practical avenues to facilitate the measurement and monitoring by the users of these statistics of the positions of groups of financial and nonfinancial corporations; and (iii) to shed light on potential work that could be undertaken to measure and monitor cross-border exposures of corporations at a later stage.

The TFFS sets methodological standards for statistics on external debt, and on public sector debt; promotes data availability on financial stocks, particularly external and public sector debt; encourages internationally accepted statistical practices to enhance data quality; and fosters inter-agency collaboration in statistical capacity building. Its members are the BIS, the Commonwealth Secretariat (ComSec), the ECB, Eurostat, the IMF, the OECD, the Paris Club Secretariat, the United Nations Conference on Trade and Development (UNCTAD), and the World Bank. See www.tffs.org.

The IBS statistics follow in fact two approaches: (1) the locational data set comprises information based on the residency of the banks, complemented by information on their nationality – this is done by aggregating (but not consolidating: there is no netting of the inter-office positions) the various residency-based statistics of the offices of the same banking group; and (2) the consolidated data set, which provides information based on nationality and is fully consolidated at group level.

2 Perspectives on Consolidation Concepts In contrast, the objective is not to propose specific guidance on consolidation rules, which could duplicate the ongoing initiatives of the various standard setters involved in this domain (see below).

This reference document builds on the outcome of the workshop organised in 2011 by the IAG and the Irving Fisher Committee on Central Bank Statistics (IFC) on “Residency/local and nationality/global views of financial positions” (IFC (2012)). It is divided into eight sections. Section 1 describes how data collected in the residency-based SNA context can be usefully complemented by a nationality-based approach, as developed in particular by the BIS. Section 2 presents a framework for assessing financial positions on such a so-called “nationality basis”, ie at a globally consolidated level.

Section 3 reviews how economic units can be classified by sector and nationality. Section 4 discusses the concept of control between two economic units, focusing on the various existing business accounting, supervisory and statistical standards and practices. Section 5 analyses the concept of a corporate group.

Section 6 reviews the scope for consolidating exposures for global entities, especially those related to cross-border and cross-sector positions. Section 7 provides examples of data sets presented on a consolidated basis and highlights some of the challenges related to consolidation. Section 8 makes some recommendations for the future.

1. Complementing the residency-based approach of the national accounts to assess financial positions The framework of the System of National Accounts, 2008 (2008 SNA; see European Commission et al (2009)) has served policymakers and analysts well in their mandate to monitor economic, monetary and financial stability conditions. It is complemented by several standards that have been developed and implemented over the past 50 years, such as the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6; see IMF (2009)), the Government Finance Statistics Manual 2014 (GFSM; see IMF (2014)) and the Monetary and Financial Statistics Manual (MFSM; see IMF (2000)). The SNA framework allows the assets and liabilities of the economic units that are resident in a specific economic territory – the “country” – to be assessed. The financial positions of these units (amounts outstanding, or “stocks”, and variations resulting from transactions over a certain period of time, or “flows”) reflect their underlying lending (saving) and borrowing (investment) behaviour. The goal is to have this information, often summarised in the so-called Flow of Funds (FoF), for the main resident institutional sectors of the economy – with the flows and positions of the domestic economy with the rest of the world being considered as an aggregate.

Available at http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf. For an introduction to the national accounts framework, see, for instance, Lequiller and Blades (2014) or Carnot et al (2011), Annex I.

www.imf.org/external/pubs/ft/bop/2007/bopman6.htm.

www.imf.org/external/np/sta/gfsm/pdf/text14.pdf.

www.imf.org/external/pubs/ft/mfs/manual/.

The importance of this area has been underscored by Recommendation #15 of the 2009 Data Gaps Initiative, which requests the IAG “to develop a strategy to promote the compilation and dissemination of the balance sheet approach (BSA), flow of funds, and sectoral data more generally”.

The SNA’s three-dimensional “from-whom-to-whom” tables presentation is sometimes referred to as a “flow of funds matrix” (see 2008 SNA #2.10, 150 and Chapter 27). Simpler accounts without counterparty information are usually referred to as “financial accounts and balance sheets”.



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