Definition: Accrued interest (on instruments denominated in fo...

Category: National accounts

Recording interest on an accrual basis implies two simultaneous transactions in the property income and, as counterpart, in the financial instrument.  In case interest is denominated in foreign currency, both must be converted into the national currency by the exchange rates prevailing at the time they are made.  Ideally, interest should be accrued daily, and so using a daily exchange rate.  In practice, the calculation is made over a period on the basis of the average exchange rate observed during the period.  For these transactions, a "spot" exchange rate, observed only at a specific point of time, could be used as a proxy only in case of very low foreign exchange volatility.  The effective payment of interest is another transaction, with a counterpart in another category of financial instruments (currency and deposits) and using an exchange rate appropriate to the actual date payment is made.  Finally, accrued interest refers conceptually to time as a "segment" and payment of interest to the time as a single point.  Under normal circumstances, an adjustment is in all likelihood needed in the revaluation account.  Although perfectly equal in foreign currency, the amounts of accrued and paid interest may diverge in national currency, due to exchange volatility.