A financial account is considered as an integral aspect of balance of payments. It involves reimbursement of liabilities and demands for non-resident companies, especially in case of cash assets. So that it’s an account that demonstrates the net acquisition or selling the assets, or settlement of obligations.
The demands of foreign nationals towards the financial assets of resident agents are called liabilities, the reverse process (claims submission made by located entities) is known as assets itself.
Essence of Financial Accounts
A financial account is used both to reflect transactions between institutional units and sectors within the same economy. It may be presented as a tracking tool for shifting the foreign assets proprietorship.
There is a particular division of financial accounts, and it includes:
- A first subaccount means holding foreign assets, for instance, to possess securities of international enterprise.
- A second subaccount anticipates controlling domestic assets from abroad, for instance, to contract a loan to local banking facilities by international institutions.
Financial Account and balance of payments
The financial account is an essential part of the balance of payments and directly reflects cross-border transactions with financial assets and liabilities. The basis for the financial account systematization are functional categories.
Therefore, functional categories facilitate analysis between different economic incentives and behavioral patterns. The main classification is used for all financial transactions, balances and income in the statistics of foreign economic activity.
There exists five major financial categories:
- Direct investments, intending to gain control over the enterprise, or stable influence on corporate governance. The key feature is a long-term relationship between the issuer and the investor.
- Portfolio, or indirect investments, including cross-border speculative transactions and balances with debt securities, or securities providing equity participation, not exceeding 10%. Notably, reserve assets are excluded from the category.
- Derivative financial instruments, performing an auxiliary function during the reselling processes with specific financial risks on the markets, regardless of the underlying instrument. The category consists of transactions with options and forward contracts.
- Reserve assets, taking measures of funding the balance of payments, and maintaining the exchange rate by currency interventions.
- Other investments, introducing the data on supply arrears based on intergovernmental agreements, as well as transactions between residents and non-residents with foreign and national currency in cash.
Variation between Capital and Current Accounts
First of all, we should realize that financial, capital and current accounts form the basis of balance payments of a certain country.
Therefore, it should be noted that financial accounts can be discerned from capital ones. The second doesn’t have influence on the production level of a state, savings ratio, or total revenue. While a current account demonstrates the present trade balance of a state, in connection with net profit, along with direct payments. It also estimates import and export data.
Financial Account facilities
The financial account includes the following monetary tools:
- monetary gold and special drawing rights (SDR);
- cash and deposits;
- debt securities;
- shares and other equity participation in the capital;
- insurance and pension reserves;
- derivative financial instruments and options.
In case of a complex transaction, comprising capital holdings and financial claims, there is a possibility to reflect an operational fraction in a capital account, and the rest - in a current one.