Valuation of Goods and Services

Valuation of Goods and Services

Just knowing the accounting principles in balance of payments is not enough for arriving actual balance of payments of different countries, it is necessary to know the basis for valuing the goods and services and their recording time in accounts.

Use of common valuation base for valuation of goods and services is very important for meaningful comparison of balance of payments data between countries that are exporting and importing. At the same time comparison of balance of payment of data among member countries of IMF is also possible only when the goods and services are valued on the basis on common price. The IMF recommends the use of “Market prices” as base, because this being the price paid by or accepted to pay “willing buyer” to a “willing seller”, where the seller and buyer are independent parties and buying and selling transactions are governed only by commercial considerations. Following the principle may not be possible in all the transactions. In other words, there are some cases or transactions, which are necessary to use some other base for valuing goods and services. There are two choices of valuation basis available generally for export and import of goods and services, they are: one f.o.b (free on board) and the other c.i.f (cost insurance fright). IMF recommends the f.o.b for valuation of goods and services, because the c.i.f base includes value of transportation and insurance in the value of the goods. In India’s balance of payments statistics, exports are valued on f.o.b basis, while imports are valued at c.i.f basis (see Table). Another problem of valuation arises when foreign currency is translated into domestic currency. It would be meaningful when the translation takes place on the basis of exchange rate prevailing at the time of translation. But in practice, transactions that occurred in a particular month are translated on the basis of average exchange rate for the month.

Valuation Time of Exports and Imports of Goods and Services

Since the balance of payment statistics are prepared on quarterly basis and they translated into domestic currency on monthly average foreign exchange rate base, the timing of recording time is very important. Here timing means recording one transaction in two different countries records should be the same time. For example India’s exported software to US for ` 500 crores on 28th October 22, 2006, then the transaction should be recorded by giving the date 28th October, 2006, in both (India and US) countries’ records, and not 28th October, 2006 in India’s records and 1st or some other date in the US records. Put in simple words, the two side of transaction should be recorded in the same time period. But there are various principles have been evolved for deciding the time. For example, exports are recorded when they are cleared by customs, and imports are recorded when the payment is made.