Transaction-Based Reporting Basics and Beyond

Transaction-based reporting is a powerful tool for businesses to track and analyze financial transactions. It involves collecting and analyzing data from various sources to gain insights into financial performance.

This type of reporting is typically done on a regular basis, such as monthly or quarterly, to provide a snapshot of the company's financial situation. In many cases, transaction-based reporting is automated, using software to collect and process data.

The goal of transaction-based reporting is to provide accurate and timely information to stakeholders, including investors, management, and regulatory bodies. By doing so, businesses can make informed decisions and stay compliant with regulatory requirements.

Transaction-based reporting can be used to track various types of transactions, including sales, purchases, and payments. It can also be used to analyze financial metrics, such as revenue, expenses, and cash flow.

Transaction reporting is a crucial aspect of transaction-based reporting, and understanding the basics is essential for accurate and comprehensive data collection. An ITRS (International Transactions Reporting System) is a key component in this process.

A model ITRS is described in chapter 18, outlining the design of a collection and processing system. This system is a closed system, meaning it captures specific types of transactions, such as single transactions reported to the banking system, transactions passing through enterprise bank accounts, and banks' own transactions.

The model ITRS collection forms, listed in appendix 2, include descriptions of various features that an ITRS may contain. These forms capture data on different types of transactions, including goods transactions, security transactions, and compensation of employees.

Here are some of the key forms that are part of the model ITRS:

The classification codes for transactions and stock positions on these forms are listed on form 3C and are consistent with those of the BPM.

In some EU member states, digital reporting is scheduled for July 2024, and businesses should start preparing today.

To make the proper VAT decision at a transactional level, you need to retrieve data from various sources, such as the ship from and product details.

You'll also need to validate data to apply the proper VAT decision, and report the required data elements of a transaction.

The SAF-T format is an example of a structured manner to store VAT data, which can be useful for audits.

However, this format alone won't help the tax authority to efficiently fight fraud, as no actual transaction information is periodically reported to the tax authority.

To achieve simultaneous recording of transactions, individual bank reporters should maintain a uniform time of recording by matching entries that pass through a bank's nostro and vostro accounts against collection forms.

Banks may choose to record transactions in different assets and liabilities, such as foreign currency, foreign exchange bank balances, and bills and notes of other banks, when claims are created, sent for collection, or recorded in nostro accounts.

Even if banks follow similar reporting procedures, timing lags may still occur, resulting in discrepancies in the total settlement item.

To resolve this, the compiler should check each large settlement transaction between domestic banks and ensure that both sides of the transaction have been recorded in the same period.

The scope of ITRS, or International Transaction Reporting System, is vast and complex. It involves the collection, processing, and analysis of financial data from various sources, including banks, financial institutions, and other relevant parties.

ITRS covers a wide range of transactions, including cash transactions, wire transfers, and other financial movements. This data is used to identify and prevent money laundering, terrorist financing, and other illicit activities.

The scope of ITRS extends to various countries and jurisdictions, requiring compliance with different regulations and guidelines. For example, in the United States, the Financial Crimes Enforcement Network (FinCEN) is responsible for implementing and enforcing ITRS regulations.

ITRS also involves the use of advanced technologies, such as artificial intelligence and machine learning, to analyze and identify patterns in financial data. This helps to improve the accuracy and efficiency of transaction reporting.

Reporting Options are designed to provide flexibility and convenience for users.

There are three main reporting options: Real-time, Scheduled, and Ad-hoc reporting. Real-time reporting allows users to view transaction data as it happens, while Scheduled reporting enables users to automate the reporting process at set intervals. Ad-hoc reporting provides a flexible option for users to create custom reports on demand.

Scheduled reporting can be set to run daily, weekly, or monthly, depending on the user's needs. This feature is particularly useful for users who require regular updates on transaction data.

This alternative requires very little change to the current VAT reporting system, with taxpayers still storing transaction data but not sending it to the tax authority in real-time.

In fact, some countries like Luxembourg already have a similar obligation in place.

The data is only required to be provided to the tax authority upon request, which can make audits more efficient.

However, this approach won't help the tax authority fight fraud effectively, as no periodic reports are sent to the authority.

As a result, the VAT gap remains at €140 billion annually.

This alternative also doesn't provide any benefits for businesses, who will still face an additional administrative burden without any real efficiency gains.

Automating your CTR processes allows you to reduce manual intervention and errors.

Our built-in validation tools and flexible capabilities enhance the quality and timeliness of completed reports while letting you adapt to changing FinCen Regulations and business needs.

Actimize’s CTR Processing & Automation solution takes the guesswork out of CTR filing with streamlined data aggregation and management, robust flexible CTR detection capabilities, automated CTR generation and validation, seamless CTR e-filing prepares, files, and tracks filing status, and comprehensive workflow management for process consistency.

Here are some key features of Actimize’s CTR Processing & Automation solution:

Banks should collect a wide range of data from their clients, including the reference number of the transaction and the reference period.

The form completed by the bank client may include the identity of the transactor, the direction of the transaction, and the currency used in the transaction. This information is crucial for accurate reporting.

Banks should also record corresponding details of their own transactions, including matching their transactions with those of clients. They should also keep track of their foreign currency positions for providing IIP data and reconciling transactions and stock positions.

National tax authorities can store transactional data to help with VAT information. This approach requires companies to report detailed transactional information to the authorities in a near-time or real-time manner.

There are two options for this approach: companies can send transactional information directly to the national tax authority, or they can send it to a shared database, such as VIES.

In the first option, the tax authority shares the information with the tax authority where the buyer is located, allowing for cross-checks. Tax authorities can also share acquisition data with each other.

The second option involves sending transactional information to a shared database, which enables automatic matching and optimal fraud detection. This approach is more efficient, but it requires EU Member States to share detailed information in a centralized manner.

Modern cryptography can help overcome the issue of trust in this scenario, allowing EU Member States to match intra-Community transactional data without sharing important details. Hashing is an important aspect of this process.

Companies can integrate the reporting obligation into their business process, sending invoice information in their preferred invoicing format. This provides compliance automation benefits for the business community.

The form completed by the bank client may include the reference number of the transaction, the reference period, the identity of the transactor, the identity of the bank accepting the form, the direction of the transaction, the currency used in the transaction, the value of the transaction, classification of the purpose of the transaction, and the country of the nonresident party.

Banks should also record corresponding details of their own transactions to match with those of clients, and details of their foreign currency positions to provide International Investment Position (IIP) data and reconcile transactions and stock positions.

The form may require the value of the transaction to be recorded in terms of the currency used, the unit of account, or both.

Measuring noncash transactions accurately is crucial for businesses and organizations.

Cashless transactions are increasing, with online payments and digital wallets becoming more popular.

The core of noncash transaction measurement involves tracking and recording digital payments, such as credit card transactions and online banking transfers.

Businesses can use data from payment processors to analyze noncash transactions, helping them identify trends and patterns.

The average person makes around 40 credit card transactions per month, according to data from a leading payment processor.

Noncash transactions can be categorized into different types, including online payments, mobile payments, and card payments.

Businesses can use this information to optimize their payment systems and improve customer experience.

Digital wallets are becoming increasingly popular, with over 50% of smartphone users using them to make payments.

By accurately measuring noncash transactions, businesses can make informed decisions about their operations and improve their bottom line.

Aggregation and Conversion is a crucial step in Transaction-Based Reporting. Transaction data from various sources needs to be aggregated to provide a unified view of business operations.

This aggregation process involves combining data from multiple transactions, such as sales, purchases, and refunds, to get a complete picture of revenue and expenses. The aggregated data is then converted into a standardized format for easier analysis and reporting.

By aggregating and converting transaction data, businesses can identify trends, track performance, and make data-driven decisions.

Aggregating the results is a crucial step in the aggregation and conversion process.

The goal of aggregation is to combine data from multiple sources into a single, unified view.

This is achieved by using various aggregation techniques, such as sum, average, and count.

For example, in the "Data Sources" section, we discussed how to combine data from different databases into a single view.

Aggregation can also involve grouping data by specific categories, as shown in the "Grouping and Sorting" section.

By doing so, you can easily identify patterns and trends in your data.

In the "Data Transformation" section, we saw how to transform data from one format to another, which is also an important aspect of aggregation.

This process enables you to work with data in a more meaningful way.

The type of aggregation technique used often depends on the specific requirements of the project.

For instance, in the "Data Analysis" section, we used the average aggregation technique to calculate the average score of a group of students.

By aggregating data in a meaningful way, you can gain valuable insights and make informed decisions.

Currency conversion is a crucial step in the aggregation process, and it's essential to get it right. The BPM recommends using the midpoint rate applicable to each transaction to convert transactions expressed in one currency to the common unit of account.

In systems where the value of each transaction is recorded in the unit of account, prevailing market exchange rates should be used for conversion. This approach is consistent with the BPM's recommendations.

However, it's not always easy to discern whether non-transaction changes in stocks are due to errors in transaction recording or exchange rate fluctuations. This can make it challenging to reconcile stocks and flows data.

Systems that record transaction values in the currencies in which they are denominated have an advantage when it comes to matching settlement transactions. Exchange rate fluctuations are not relevant in this approach.

But, for practical reasons, period average exchange rates are often used, which can introduce errors into the BOP statement. This approach can also cause problems in the national accounts when values of items like imports differ from related series like investments.

In practice, using period average exchange rates may yield similar results to using the BPM methodology, especially when exchange rates are not volatile. However, there's limited information on the statistical impact of using different conversion procedures.

To compile a Balance of Payments (BOP) statement, it's essential to classify transactions accurately, just like in the International Transactions Reporting System (ITRS). This ensures that the classification used in the ITRS matches the BOP statement as closely as possible.

Someone with extensive knowledge of commercial practice and BOP classification requirements should classify transactions to the appropriate BOP category. This is addressed in chapter 18.

Transactions of less than certain amounts may not need to be reported, thanks to thresholds used in international transactions reporting systems. However, aggregate records of small transactions should still be kept to obtain overall aggregate results and assist in reconciliation.

It's crucial to apply judgment when adopting thresholds to ensure overall data quality remains acceptable. This may involve gathering information on small transactions through periodic sample surveys or analysis, which could be undertaken before thresholds are raised.

Valuation adjustments can be necessary when compiling a BOP statement, as the BPM requires uniform valuations, but ITRS may not achieve this uniformity.

Goods may be recorded on an f.o.b., c.i.f, or other basis, depending on the contract price in individual transactions.

The compiler may need to make valuation adjustments to ensure goods are recorded on a uniform f.o.b. basis.

Bundling of transactions occurs when a single payment covers multiple classification categories.

A payment on a loan may include loan repayment, interest payment, and fees for financial services, requiring separate reporting of each component.

Transactions may be recorded on a net basis, rather than gross, particularly in finance and direct investment relationships.

This can involve offsetting credit and debit transactions, such as foreign exchange payments.

Thresholds are used in many international transactions reporting systems to prevent undue reporting burdens and processing costs. Transactions of less than a certain amount, known as the threshold, don't need to be reported individually.

However, an aggregate record of small transactions should be kept to obtain overall aggregate results and to assist in the process of reconciliation.

The use of thresholds can be more comfortable if information on the size and classification of small transactions is available. This information can be gathered from periodic sample surveys or from an analysis of small transactions.

In fact, compilers may feel more comfortable about using higher thresholds if they have some information on types of transactions that fall below the threshold.

Modifying the ITRS model is often necessary as foreign exchange regulations change. This is because the original assumptions of the simple ITRS model no longer apply.

The model originally assumed that residents couldn't hold foreign currency accounts with domestic banks or nonresident banks, nonresidents couldn't hold accounts with domestic banks, and residents couldn't have external claims or liabilities.

To adapt to these changes, compilers have modified their systems to include the reporting of details of account transactions and balances by residents with foreign currency accounts at domestic banks or nonresident banks.

Resident enterprises also report details of their noncash transactions, such as granting trade credit or loans, with nonresidents.

The simple ITRS model is no longer sufficient for many countries as foreign exchange regulations are relaxed or abolished.

In situations where residents can hold foreign currency accounts with domestic banks or accounts with nonresident banks, the model needs to be modified.

Residents who have foreign currency accounts at domestic banks or accounts at nonresident banks report details of account transactions and balances.

Residents also report details of domestic currency transactions involving nonresident bank accounts at domestic banks.

Transactions performed through nonresident bank accounts at resident banks are monitored, although the nonresident entity has no obligation to report details of individual transactions.

Here are the key modifications to the simple ITRS model:

Offshore banking units established in a country also require consideration.

A Model ITRS is a closed system that captures various types of transactions and data. The model collection forms include descriptions of features that an ITRS may contain.

The model ITRS outlined in chapter 18 includes forms 3P, 3C, 4, 5, and 13. These forms capture single transactions reported to the banking system, transactions passing through enterprise bank accounts, and banks' own transactions and stock positions.

Form 3P captures single transactions reported to the banking system, while form 3C lists classification codes for transactions and stock positions. These codes are consistent with those of the BPM.

Form 5 captures transactions passing through enterprise bank accounts at nonresident banks and through foreign currency accounts at domestic banks. Form 4 captures banks' own transactions and stock positions, as well as data reconciling stock positions and flows.

A supplementary form must be developed to measure reinvested earnings on direct investment, modeled on form 12, parts G and H.

Transaction-Based Reporting offers various reporting formats and tools to help businesses make informed decisions.

The most common reporting format is the standard transaction report, which provides a detailed breakdown of all transactions, including dates, amounts, and transaction types.

This format is ideal for businesses that need to track every single transaction, such as those in the finance or accounting industry.

Another popular reporting format is the summary report, which provides a condensed view of key metrics, such as total sales or total expenses.

This format is suitable for businesses that need to quickly identify trends and patterns in their data, such as those in the retail or e-commerce industry.

Reporting tools like Excel, Google Sheets, and Tableau can be used to create and customize reports to meet specific business needs.

These tools offer a range of features, such as data visualization, filtering, and sorting, to help businesses extract insights from their data.

Using the UN EDIFACT standard for transaction-based reporting has many benefits. It's steadily expanding worldwide, making the process more efficient and reducing costs for enterprises and banks.

The automatic nature of data provision is a significant cost-saver. Once systems are programmed to send relevant data, there's no need for subsequent reporting unless requirements or systems change.

More timely and accurate data is a benefit to BOP compilers. This is achieved through the use of electronic data, which reduces the need for manual reporting.

The use of electronic data also allows for more efficient reporting to authorities. This is because business systems are conforming to the EDIFACT standard, making it easier to report information.

Here are some of the benefits of using the UN EDIFACT standard:

These benefits are a result of the standardization of data provision, making it easier to report information to authorities.

In July 2024, some EU member states will implement digital reporting developments, and businesses should start preparing now.

To make the proper VAT decision at a transactional level, you'll need to retrieve data such as the ship from and product details. This data can come from various sources, and it's essential to determine where it can be accessed.

Pincvision's eInvoicing and eReporting solution can help with this process, working with standard processes and adding additional VAT validations before reporting to tax authorities.

End-to-end management of CTR requirements is crucial for businesses to meet their obligations and avoid fines and reputational damage.

In today's complex business environment, firms with outdated legacy systems and labor-intensive processes struggle to monitor suspicious transactions and report associated currency transaction reports (CTRs) and monetary instrument logs (MILs) accurately.

This can lead to non-compliance, resulting in significant financial penalties and damage to a company's reputation.

Firms need to understand their complex, dynamic business and regulatory requirements to keep their CTR program efficient and effective.

As digital reporting becomes increasingly common, tax authorities are in favor of these changes as they allow their officers to verify invoices earlier and detect fraud more quickly.

Tax authorities are also able to increase VAT collection and make audits easier, instead of lengthy post-audits. This is a significant shift from periodic reporting towards real-time VAT compliance/transactional reporting.

Businesses will need to prepare for changes in their VAT compliance processes, as digital reporting and eInvoicing will require accurate data on a transactional level. Corrections after month end will most likely trigger questions or potentially audits.

Some questions to consider when preparing for digital reporting include:

Tax administrations will have access to transactional data at an earlier stage, making it even more important to be accurate on a transactional level.

ESMA has started reviewing the obligations to report transactions, a process that involves looking at the current requirements for reporting transactions and reference data. This review aims to ensure that the current regulations are effective and efficient.

Businesses should be aware that digital reporting developments are scheduled for July 2024 in some EU member states, and the VIDA proposals are being considered at an EU level. This means that companies should start preparing for these changes today.

To prepare for digital reporting, businesses should consider where they can retrieve data to make proper VAT decisions at a transactional level. This includes data such as ship from and product details.

Data validation is also crucial to applying the proper VAT decision, and businesses should consider how they can validate their data to meet the required reporting elements.