Transactions

5.15 Every transaction is either a monetary or nonmonetary transaction. A monetary transaction is one in which one institutional unit makes a payment (receives a payment) or incurs a liability (acquires an asset) stated in units of currency. A nonmonetary transaction is one that is not initially stated in units of currency. Monetary and financial statistics are concerned mostly with monetary transactions, as the focus is on transactions in financial instruments (see Table 5.3).

Table 5.3

Main Transactions by Asset/Liability Category for Financial Corporations

¹Transactions also include SDRs obtained from a new SDR allocation or disposed of because of SDR cancellation.

²Includes redemptions/repayments arising from debt reorganization, including debt cancellation by mutual agreement (debt forgiveness).

³For more details see paragraphs 5.185, 5.190, 5.197, and 5.199.

Note: SDR=Special Drawing Rights.

Table 5.3

Main Transactions by Asset/Liability Category for Financial Corporations

Asset/Liability	Transactions
Monetary gold (central bank asset)	Purchases less sales (between monetary authorities and international financial institutions only) Plus accrued interest on unallocated gold accounts with nonresidents that give title to claim the delivery of gold
SDR holdings (central bank asset)	New SDR allocation less SDR cancellation Purchases of SDRs less sales of SDRs1 Plus accrued interest on SDR holdings Plus remuneration receipts in SDRs from the IMF on the reserve tranche position Plus IMF purchases and loan receipts in SDRs Plus interest receipts in SDRs on lending to the IMF Less IMF repurchases and loan repayments in SDRs Less payments of charges in SDRs to the IMF
SDR allocations (central bank liability)	New SDR allocation less SDR cancellation Plus accrued interest (charges) on SDR allocation
Domestic currency holdings (other than central bank)	Net acquisition of currency
Domestic currency (central bank liability)	Change in currency in circulation (see paragraph 6.22)
Foreign currency holdings	Purchases less sales
Deposits—assets or liabilities	Deposit placements/receipts less withdrawals Plus accrued interest for the period
Debt securities—assets	Purchases less sales, redemptions and interest payment2 Plus accrued interest for the period
Debt securities—liabilities	Issuances less redemptions, purchases of own debt securities, and interest payments2 Plus accrued interest for the period
Loans—assets	Loan extensions less loan principal and interest payments2 Plus accrued interest for the period
Loans—liabilities	Loan receipts less loan principal and interest payments2 Plus accrued interest for the period
Equity and investment fund shares—assets	Purchases and new contributions less sales and withdrawal of capital
Equity—liabilities	New funds contributed by owners less outflow from dividends when shares go ex-dividend and withdrawal of capital Plus/minus inflow or outflow of retained earnings for foreign direct investment enterprises only Plus/minus profit or loss from corresponding transactions
Investment fund shares—liabilities	Sales less redemptions and/or buy-backs
Insurance, pension and standardized guarantee schemes—assets	Prepayments of insurance premiums and net fees for standardized guarantees Plus/minus change in claims of pension funds on pension managers for any underfunding/overfunding
Insurance, pension and standardized guarantee schemes—liabilities	Amounts of estimated obligations to beneficiaries and holders accrued during the period3 less payments to beneficiaries from reserves and provisions
Financial derivatives—assets	Purchases less sales and settlements Minus receipts of nonrepayable margins
Financial derivatives and employee stock options—liabilities	Sales less settlements Minus payments of nonrepayable margins
Other accounts receivable/payable	Transactions in trade credit and advances, etc.
Nonfinancial assets	Acquisitions less disposals Less consumption of fixed assets

¹Transactions also include SDRs obtained from a new SDR allocation or disposed of because of SDR cancellation.

²Includes redemptions/repayments arising from debt reorganization, including debt cancellation by mutual agreement (debt forgiveness).

³For more details see paragraphs 5.185, 5.190, 5.197, and 5.199.

Note: SDR=Special Drawing Rights.

View Table

Table 5.3

Main Transactions by Asset/Liability Category for Financial Corporations

Asset/Liability	Transactions
Monetary gold (central bank asset)	Purchases less sales (between monetary authorities and international financial institutions only) Plus accrued interest on unallocated gold accounts with nonresidents that give title to claim the delivery of gold
SDR holdings (central bank asset)	New SDR allocation less SDR cancellation Purchases of SDRs less sales of SDRs1 Plus accrued interest on SDR holdings Plus remuneration receipts in SDRs from the IMF on the reserve tranche position Plus IMF purchases and loan receipts in SDRs Plus interest receipts in SDRs on lending to the IMF Less IMF repurchases and loan repayments in SDRs Less payments of charges in SDRs to the IMF
SDR allocations (central bank liability)	New SDR allocation less SDR cancellation Plus accrued interest (charges) on SDR allocation
Domestic currency holdings (other than central bank)	Net acquisition of currency
Domestic currency (central bank liability)	Change in currency in circulation (see paragraph 6.22)
Foreign currency holdings	Purchases less sales
Deposits—assets or liabilities	Deposit placements/receipts less withdrawals Plus accrued interest for the period
Debt securities—assets	Purchases less sales, redemptions and interest payment2 Plus accrued interest for the period
Debt securities—liabilities	Issuances less redemptions, purchases of own debt securities, and interest payments2 Plus accrued interest for the period
Loans—assets	Loan extensions less loan principal and interest payments2 Plus accrued interest for the period
Loans—liabilities	Loan receipts less loan principal and interest payments2 Plus accrued interest for the period
Equity and investment fund shares—assets	Purchases and new contributions less sales and withdrawal of capital
Equity—liabilities	New funds contributed by owners less outflow from dividends when shares go ex-dividend and withdrawal of capital Plus/minus inflow or outflow of retained earnings for foreign direct investment enterprises only Plus/minus profit or loss from corresponding transactions
Investment fund shares—liabilities	Sales less redemptions and/or buy-backs
Insurance, pension and standardized guarantee schemes—assets	Prepayments of insurance premiums and net fees for standardized guarantees Plus/minus change in claims of pension funds on pension managers for any underfunding/overfunding
Insurance, pension and standardized guarantee schemes—liabilities	Amounts of estimated obligations to beneficiaries and holders accrued during the period3 less payments to beneficiaries from reserves and provisions
Financial derivatives—assets	Purchases less sales and settlements Minus receipts of nonrepayable margins
Financial derivatives and employee stock options—liabilities	Sales less settlements Minus payments of nonrepayable margins
Other accounts receivable/payable	Transactions in trade credit and advances, etc.
Nonfinancial assets	Acquisitions less disposals Less consumption of fixed assets

¹Transactions also include SDRs obtained from a new SDR allocation or disposed of because of SDR cancellation.

²Includes redemptions/repayments arising from debt reorganization, including debt cancellation by mutual agreement (debt forgiveness).

³For more details see paragraphs 5.185, 5.190, 5.197, and 5.199.

Note: SDR=Special Drawing Rights.

5.16 Interest is a form of investment income that is receivable by the owners of certain kinds of financial assets, namely deposits, debt securities, loans, and other accounts receivable for putting the financial assets at the disposal of another institutional unit. Income on Special Drawing Rights (SDR) holdings and allocations is also included in interest. Interest may be a predetermined sum of money, or a fixed or variable percentage of the principal outstanding. For financial assets and liabilities, interest can (and usually does) accrue on the principal amount, resulting in an interest cost for the debtor (and a corresponding income for the creditor), which is recorded as a transaction. When this cost is paid periodically, as commonly occurs, it is known as an interest payment. All other payments by the debtor to the creditor that reduce the principal amount outstanding are known as principal payments.

Revaluations

5.17 Revaluations result from price changes and can accrue on almost all economic assets held for any length of time during a reporting period. Revaluations may be unrealized or realized.

5.18 An unrealized revaluation is one accruing on an asset that is still owned or a liability that is still outstanding at the end of the reporting period. The values of the assets and liabilities in the closing balance sheet incorporate the unrealized revaluations.

5.19 A revaluation is realized when an asset is sold, redeemed, used or otherwise disposed of, or a liability incorporating a revaluation is repaid. The value of transactions includes the value of realized revaluations. In other words, unrealized holding gains are realized when transactions take place.

5.20 The asset and liability categories that are subject to revaluation in the methodology of this Manual are shown in Table 5.4.

Table 5.4

Revaluations by Asset/Liability Category for Financial Corporations

¹Financial statistics only. For financial statistics, liabilities in the form of equity are valued at market or fair value.

²Applies to components denominated in foreign currency.

Note: SDR = Special Drawing Rights.

Table 5.4

Revaluations by Asset/Liability Category for Financial Corporations

Asset or Liability		Exchange rate changes	Other price changes
Monetary gold (central bank asset)		√	√
SDRs (central bank asset)		√
Domestic currency
Foreign currency		√
Deposits
	In domestic currency
	In foreign currency	√
Debt securities
	In domestic currency		√
	In foreign currency	√	√
Loans
	In domestic currency		√
	In foreign currency	√	√
Equity and investment fund shares (assets)
	In domestic currency		√
	In foreign currency	√	√
Equity (liabilities)1			√
	Investment fund shares
	In domestic currency		√
	In foreign currency	√	√
	Insurance, pension, and standardized guarantee schemes (assets)	√2	√
	Insurance, pension, and standardized guarantee schemes (liabilities)	√2	√
Financial derivatives and employee stock options
	In domestic currency		√
	In foreign currency	√	√
Other accounts receivable/payable		√
Nonfinancial assets			√

¹Financial statistics only. For financial statistics, liabilities in the form of equity are valued at market or fair value.

²Applies to components denominated in foreign currency.

Note: SDR = Special Drawing Rights.

View Table

Table 5.4

Revaluations by Asset/Liability Category for Financial Corporations

Asset or Liability		Exchange rate changes	Other price changes
Monetary gold (central bank asset)		√	√
SDRs (central bank asset)		√
Domestic currency
Foreign currency		√
Deposits
	In domestic currency
	In foreign currency	√
Debt securities
	In domestic currency		√
	In foreign currency	√	√
Loans
	In domestic currency		√
	In foreign currency	√	√
Equity and investment fund shares (assets)
	In domestic currency		√
	In foreign currency	√	√
Equity (liabilities)1			√
	Investment fund shares
	In domestic currency		√
	In foreign currency	√	√
	Insurance, pension, and standardized guarantee schemes (assets)	√2	√
	Insurance, pension, and standardized guarantee schemes (liabilities)	√2	√
Financial derivatives and employee stock options
	In domestic currency		√
	In foreign currency	√	√
Other accounts receivable/payable		√
Nonfinancial assets			√

¹Financial statistics only. For financial statistics, liabilities in the form of equity are valued at market or fair value.

²Applies to components denominated in foreign currency.

Note: SDR = Special Drawing Rights.

Other changes in the volume of assets

5.21 Separate entries for the financial flows arising from OCVA should be shown for all categories of assets and liabilities included in monetary statistics, as described in Chapter 7, and in the financial statistics as described in Chapter 8. The circumstances that result in entries in the OCVA account are grouped into six categories, most of which have several subcategories.³ The following are the categories and subcategories that are relevant for the financial corporations (FCs) sector in most countries, and are relevant to the compilation of monetary and financial statistics (see Table 5.5).

Table 5.5

Other Changes in the Volume of Assets by Asset/Liability Category

¹In monetary statistics, OCVA entries for provisions are shown in Other accounts payable [MS] and in Equity liability [MS] (as a reduction in Current year result). The entry for nonfinancial assets in this category relates to the corrections in the calculation of consumption of fixed capital.

Note: SDR = Special Drawing Rights; OCVA = other changes in the volume of assets.

Table 5.5

Other Changes in the Volume of Assets by Asset/Liability Category

Asset or Liability	Economic appearance of assets, catastrophic losses (assets only), and uncompensated seizures (assets only)	OCVA not elsewhere classified, including provisions1 and accounting entries	Changes in classification
Monetary gold (central bank asset)	√		√
SDRs (central bank)
Domestic currency	√		√
Foreign currency	√		√
Deposits	√		√
Debt securities	√		√
Loans	√		√
Equity and investment fund shares (assets)	√		√
Equity and investment fund shares (liabilities)		√	√
Insurance, pension and standardized guarantee schemes (assets)	√	√
Insurance, pension, and standardized guarantee schemes (liabilities)	√	√
Financial derivatives and employee stock options	√
Other accounts receivable/payable	√	√	√
Nonfinancial assets	√	√	√

¹In monetary statistics, OCVA entries for provisions are shown in Other accounts payable [MS] and in Equity liability [MS] (as a reduction in Current year result). The entry for nonfinancial assets in this category relates to the corrections in the calculation of consumption of fixed capital.

Note: SDR = Special Drawing Rights; OCVA = other changes in the volume of assets.

View Table

Table 5.5

Other Changes in the Volume of Assets by Asset/Liability Category

Asset or Liability	Economic appearance of assets, catastrophic losses (assets only), and uncompensated seizures (assets only)	OCVA not elsewhere classified, including provisions1 and accounting entries	Changes in classification
Monetary gold (central bank asset)	√		√
SDRs (central bank)
Domestic currency	√		√
Foreign currency	√		√
Deposits	√		√
Debt securities	√		√
Loans	√		√
Equity and investment fund shares (assets)	√		√
Equity and investment fund shares (liabilities)		√	√
Insurance, pension and standardized guarantee schemes (assets)	√	√
Insurance, pension, and standardized guarantee schemes (liabilities)	√	√
Financial derivatives and employee stock options	√
Other accounts receivable/payable	√	√	√
Nonfinancial assets	√	√	√

¹In monetary statistics, OCVA entries for provisions are shown in Other accounts payable [MS] and in Equity liability [MS] (as a reduction in Current year result). The entry for nonfinancial assets in this category relates to the corrections in the calculation of consumption of fixed capital.

Note: SDR = Special Drawing Rights; OCVA = other changes in the volume of assets.

• a. Economic appearance and disappearance of assets. The following two subcategories are more relevant for FCs:

  Changes in the value of goodwill and marketing assets. FCs may show assets in the form of purchased goodwill on their balance sheets. The value of goodwill and marketing assets is the difference between the value paid for an enterprise as a going concern and the value of its assets less the value of its liabilities (excluding equity). Goodwill that is not evidenced by a sale/purchase is not considered an economic asset and, therefore, does not enter the monetary and financial statistics. The value of purchased goodwill is calculated at the time of sale, entered as a nonfinancial asset in the books of the seller in the OCVA account and then recorded as a transaction in nonfinancial assets (sale of goodwill) with the purchaser. Thereafter, the purchased goodwill is classified as a nonfinancial asset in the books of the purchaser and is written down via entries in the OCVA account (2008 SNA, paragraph 12.34).

  Appearance and disappearance of financial assets and liabilities. Included in this subcategory are write-offs of bad debts by creditors. Debt write-off is a unilateral cancellation of debt by the creditor. Recognition by a creditor that a financial claim can no longer be collected due to bankruptcy or other factors and the consequent removal of the claim from the balance sheet of the creditor should be accounted for here. Write-downs, which are partial write-offs, are also accounted here.

• b. Catastrophic losses. The volume changes recorded as catastrophic losses in the OCVA account are the result of large-scale, discrete, and recognizable events that may destroy assets within any asset category. Such events include natural disasters, acts of war, riots, and technological accidents. Catastrophic losses most commonly apply to nonfinancial assets but may also apply to the loss of financial assets and, in particular, the loss of currency (for instance, if currency held by an FC is destroyed) and other bearer-type financial assets, as well as to those cases when the written records evidencing ownership over financial assets are destroyed.

• c. Uncompensated seizures. Governments or other institutional units may take possession of (confiscate) assets of other institutional units, including units owned by nonresidents, without full compensation for reasons other than the nonpayment of taxes, fines, or similar levies. If the compensation for such seizures falls substantially short of the market or fair value of the assets as shown on the balance sheet, the difference should be recorded in the OCVA account as a decrease in the assets of the institutional unit losing the assets. Foreclosures and repossession of goods by creditors are not treated as uncompensated seizures. They should be treated as transactions (i.e., disposals by debtors and acquisitions by creditors) because, by explicit or general understanding, the agreement between the debtor and creditor provided this avenue of recourse.

• d. Other changes in volume not elsewhere classified. This category comprises the following items:

  Corrections in the calculation of consumption of fixed capital. This subcategory covers entries in the OCVA account arising from the impact of unexpected events (other than catastrophic losses) not anticipated when allowances were specified for the consumption of fixed capital or the assumptions underlying the calculation of consumption of fixed capital were mistaken.

  Life insurance and annuities entitlements. For an annuity, the relationship between premiums and benefits is usually determined when the contract is entered into, taking account of mortality data available. Any subsequent changes in the underlying relationship will affect the liability of the annuity provider towards the beneficiary and the consequences are recorded in OCVA.

  Pension entitlements. For defined benefit pension plans, an entry in the OCVA account captures changes in the actuarial-determined liability that results from changes in the benefits structure—for example, changes in the benefits formula and reductions in the pensionable age. Thus changes to pension entitlements as a result of changes in model assumptions are shown as other changes in volume, whereas changes negotiated between the parties are recorded as transactions.

  Provisions for calls under standardized guarantee schemes. When an institutional unit underwrites a standardized guarantee scheme, a provision should be entered in its accounts for the expected excess of calls under the scheme over any fees received, investment income, or recoveries made. Changes to these provisions are recorded as OCVA whenever a new scheme is introduced or a significant change to the expected level of calls is recognized, beyond what will be recovered.⁴

• e. Changes in classifications. This category comprises the following events:

  Changes in sector classification and structure. Changes in the activities, legal status, and/or organizational structure of institutional units can result in their sectoral reclassification. Reclassifying an institutional unit from one sector to another transfers its entire balance sheet.⁵ Entries in the OCVA account can also arise from changes in structure—for example, when a corporation disappears as an independent legal entity by virtue of its being absorbed by another corporation or when a corporation is split into more than one institutional unit.⁶ It is recommended that sectoral reclassifications of FCs be recorded as if these events occurred at the beginning of the reporting period. In particular, the asset prices (or fair values) and exchange rates that prevailed at the beginning of the period should be used to calculate the amounts for the OCVA entries. A special case arises when the institutional coverage in monetary and financial statistics is expanded. Ideally, it is expected that the accounts of all FCs are covered for all periods, but this is not always the case in practice, especially for OFCs. In such cases, changes in a period in assets and liabilities of the FCs subsector arising from the expansion of coverage of the subsector are to be recorded as OCVA and shown separately.

  Changes in classification of assets and liabilities. Because of changes in its characteristics or in the purpose for which it is used, an asset or liability may be classified differently in the opening and closing balance sheets. For example, loans may be reclassified as debt securities in accordance with the guidance that loans that become negotiable (i.e., marketable) should be reclassified as debt securities. Deposits can be reclassified as (1) “included in broad money” for deposits that are newly included in broad money, and (2) “excluded from broad money” for deposits of ODCs under liquidation and excluded from broad money. Furthermore, when a central bank purchases gold bullion as a reserve asset from a counterparty that is not a monetary authority or an international financial institution, a transaction in nonmonetary gold—that is, an increase in nonfinancial assets of the central bank and a decrease in nonfinancial assets of the seller—is recorded. Then a reclassification from nonfinancial to financial assets (valuables to monetary gold) is recorded in the OCVA account (monetization) by the central bank. To demonetize gold (in preparation for sale to a counterparty other than a monetary authority or an international financial institution), the central bank would record OCVA entries for a gold reclassification—that is, a negative entry in the monetary gold category and a positive entry in nonfinancial assets of the central bank (see also 2008 SNA, paragraph 12.36, and the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6), paragraph 9.18). In determining the amounts for OCVA entries arising from reclassification of financial assets and liabilities, the asset prices (or fair values) and exchange rates that prevailed on the date of the reclassification should be used.

5.22 In reference to changes in classifications, the OCVA account is used to record changes in the classification of institutional units or assets and liabilities, but not corrections of data that were misclassified in earlier periods. It is important to trace the origins of data misclassification and to correct all current and historical data on stocks and flows. If this is not possible, a clear indication of the break in series should be provided.

Recording on an accrual basis

5.24 Accrual accounting records flows and changes in the corresponding stocks at the time economic value is created, transformed, exchanged, transferred, or extinguished. Accrual recording is used in macroeconomic statistics as a general principle. This means that flows and stocks are recorded when a change of economic ownership (see paragraph 4.9) takes place. The effects of economic events are thus recorded in the period in which they occur, irrespective of whether payment was made. In principle, the two parties to a transaction should record it at the same time. However, in practice adjustments may be needed so that the same transaction date is applied to the data for both parties.

5.25 The change of economic ownership is central in determining the time of recording on an accrual basis for transactions in financial assets. A change in economic ownership means that the majority of risks, rewards, and rights and responsibilities of ownership in practice are transferred.

5.26 In practice, it is not always possible to determine the exact time when the economic ownership has changed, leading the parties to record the same transaction at different times. In particular, differences may arise from delays in mail delivery or differences in the time zones where the parties operate, as well as from differences in the time-of-recording conventions (see also the next subsection). It is important to make timing adjustments in cases in which major divergences occur from the required basis. In choosing among source data, compilers are encouraged to use those sources that most closely match the needs of accrual accounting. For example, records of drawings on loans are preferable to sources that quote authorization dates or program dates that may not be realized. Information on interest from either the payments records or debt service schedule may not be appropriate for accrual recording. For deriving accrued interest, the data on positions and contractual interest rates can be used.

5.27 For some financial instruments, the debtor does not make any payments to the creditor until the financial instrument matures, at which time a single payment discharges the debtor’s liability; the payment covers the amount of funds originally provided by the creditor and the interest accumulated over the entire life of the financial instrument. The interest accruing in each period prior to maturity should be recorded as a financial transaction representing a further acquisition of the financial asset by the creditor and an equal incurrence of a liability by the debtor.

Trade date and settlement date accounting

5.28 A transaction in financial assets is recorded on the trade date (i.e., the time of change in ownership of a financial asset) rather than on the settlement date (i.e., the time of delivery of the financial asset). If settlement of a financial transaction occurs after the ownership has changed, this gives rise to accounts receivable/payable.

5.29 When the transaction date is in one reporting period and the settlement date is in the next reporting period, the recording entries for an asset purchase are:

• a. First reporting period. The asset purchase is included in transactions (T), and any revaluation of the asset from the transactions date to the end of the first reporting period is included in valuation changes (VC). An accounts payable is recorded due to the time lag between the trade and settlement dates.

• b. Second reporting period. When settled, the accounts payable is extinguished and currency and deposits are reduced.

5.30 Adjustment to a transaction-date basis should be made for transactions that are recorded on a settlement-date basis, but for which settlement does not take place until the next reporting period. Data adjustment relies on data availability and the reporting system. Restatement of asset transactions—from settlement date accounting to transaction date accounting—is illustrated with numerical examples in Annex 5.4. In general, a successful adjustment for time of recording and valuation depends on granular data availability and a good information technology (IT) system.

General principles

5.31 Transactions in financial assets and liabilities should be recorded at the prices at which they were bought and sold (see paragraph 5.39) excluding any transaction costs: that is, service charges, fees, commissions, taxes, etc. should be recorded separately from the transaction in the financial asset and liability. The latter is because both debtors and creditors should record the same amount for the same transaction in a financial asset/liability. Transaction costs include service charges, fees, commissions, taxes, and similar payments whether charged explicitly, included in the purchaser’s price, or deducted from the seller’s proceeds.

5.32 Transaction costs can be divided into two types—explicit and implicit transactions costs:

• a. Examples of explicit type of transaction costs are service charges, fees, commissions, such as a brokerage commission, and domestic taxes expressed as a fixed amount per transaction or as a percentage of the value of an asset purchase or sale.

• b. Examples of the implicit type are transaction costs that are built into the bid-ask price spreads for financial assets. A market specialist stands ready to buy a financial asset at the quoted bid price and, at the same time, is prepared to sell the same financial asset at an asked price (that is, offer price) that is above the bid price. The spread between the bid and ask price—the profit margin of the market specialist—is a measure of transaction costs incurred by the buyer and seller combined. Paragraphs 5.35–5.36 provide guidance on the treatment of the transaction costs embedded in the bid-ask spreads.

5.33 Explicit commissions, service charges, and fees that buyers and sellers pay as transaction costs are treated as payments for services.⁷ Taxes and similar compulsory payments are transfers. Transaction costs are excluded from the valuation of financial transactions, and end-period stocks. Transaction costs reduce/increase Equity liability [MS] through current-year results for payers/payees, for the period in which the financial asset is acquired/provided.

5.34 When source data include some or all types of transaction costs in the amounts of asset purchases or sales, the explicit and implicit charges would need to be excluded.

Bid and ask prices

5.35 Transactions are to be recorded at the prices at which financial assets are bought and sold excluding transaction costs. Transaction data should, therefore, be adjusted to take account of the transaction costs embedded in the buying bid and selling ask prices. In acquiring securities in the secondary market, a FC usually pays the ask (or offer) price in the secondary market and records the securities transaction in the full amount paid—that is, ask price per security times number of securities acquired. The transaction should be valued at the mid-price between the bid-offer prices, with the difference with the offer price recorded as a transaction cost. Subsequent revaluation of the securities position should also be based on the mid-price.

5.36 Flows and stocks in foreign–currency-denominated financial instruments are also recorded at the relevant midpoint exchange rate.

Fair values

5.44 The fair value of a financial asset or liability is a market-equivalent value defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. It thus represents an estimate of what could be obtained if the creditor had sold the financial claim.

5.45 Two general methods for establishing fair values involve use of either:

• a. Relative valuation: Market prices of financial assets and liabilities that are market-traded, but otherwise similar to the nontraded or infrequently traded financial assets and liabilities that are being valued; or

• b. Absolute valuation: Discounted present values of future cash flows.

5.46 Relative valuation involves estimating the fair value of nontraded or infrequently traded financial assets and liabilities using the market price of a similar but market-traded financial instrument. For example, the fair-value price of an infrequently traded bond with five-year remaining maturity might be given by the market price of a publicly traded five-year bond having a comparable risk. In other cases, it may be appropriate to use the market price of a similar financial instrument, but with some adjustment in the fair value to account for differences in liquidity and/or risk level between the traded and nontraded instruments. For example, the fair value of unlisted equity shares held by an FC may be based on the market price of equity shares of another similar corporation that has traded shares. Furthermore, the fair value may need to be adjusted for differences in the scale of operations, number of outstanding shares, and other factors that are perceived as differentiating the values of the nontraded and traded shares.

5.47 In some cases, the financial asset or liability may possess some characteristics of each of several other financial instruments, even though its characteristics are not generally similar to any one of these instruments. In such cases, information on the market prices and other characteristics (e.g., type of instrument, issuing sector, maturity, credit rating) of the traded instruments should be considered in estimating the fair value of the nontraded instrument.

5.48 Absolute valuation involves valuing financial assets and liabilities based on the present or time-discounted value of future cash flows. This is a well-established approach to valuation, in both theory and practice (see Box 5.1).

Other valuations

5.49 It is important to clearly distinguish between various valuation terms. Market values, fair values (explained previously), nominal values, and book values should be distinguished from such notions as amortized values, face values, and historic cost, explained as follows.

• a. Nominal value refers to the outstanding amount at any moment in time the debtor owes to the creditor. It reflects the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments (which includes any payments covering accrued interest). For debt instruments indexed to a “narrow” index (such as a commodity price, stock price, or gold price), the nominal value can also include holding gains and losses arising from movements in the index (see also paragraph 5.58). Nominal value of a financial asset or liability denominated in foreign currency also includes holding gains or losses arising from exchange rate changes. At any specific point in time, the nominal value of traded financial assets may deviate from their market values due to revaluations arising from market price changes. For financial instruments such as deposits, loans, and other accounts receivable/payable, the lack of generally available market values means that these instruments are recorded using their nominal value.

• b. Amortized value reflects the amount at which the financial asset or liability was measured at initial recognition minus the principal repayments and excluding accrued interest.⁹ On the date of each scheduled payment (after the scheduled payment is made), amortized value is the same as nominal value, but it may differ from the nominal value on other dates because nominal value includes interest that has accrued and not been paid.

• c. Face value is the undiscounted amount to be paid to the holder of a debt security at or before maturity. It is also known as “par value” or simply “par.” Before maturity, the market value of a debt security may be greater or lower than face value, depending on the interest rate payable and the perceived risk of default. As debt securities approach maturity, market value approaches face value. At maturity, the market value is equal to the face value.

• d. Book value generally refers to the value recorded in the entity’s records. Book values may have different meanings because their values are influenced by the timing of acquisition, company takeovers, frequency of revaluations, and tax and other regulations. Book value is used in this Manual to value Equity liability [MS].

• e. Historic cost reflects the cost at the time of acquisition and sometimes it also may reflect occasional revaluations.

Instruments denominated in foreign currency

5.50 The standard unit of account for monetary and financial statistics is the domestic currency unit. Thus it is necessary to convert all foreign-currency-denominated stocks and flows into domestic currency amounts using market exchange rates. Flows in foreign-currency-denominated instruments are converted into the domestic currency unit using the market exchange rate prevailing at the time the flow takes place. Stocks denominated in foreign currency should be converted into domestic currency values at the market exchange rate prevailing at the balance sheet date. The midpoint between the buying and selling rate of exchange should be used for both flows and stocks so that any service charge is excluded (see paragraph 5.36).

5.51 Market exchange rate quotations in major world markets such as the foreign exchange market in London or New York should be used for convertible currencies.¹⁰ For nonconvertible currencies, it may be necessary to use exchange rate quotations from regional or other specialized foreign exchange markets. If the exchange rate for the last day of the reporting period is unavailable, the rate quotation for an earlier date (as near to the end of the reporting period as possible) should be used for converting stock data to domestic currency units.

5.52 Institutional units sometimes apply exchange rates that differ from market rates in converting stocks and flows into domestic currency units. If the conversion to domestic currency units is based on a single official exchange rate or on an exchange rate from an official multiple exchange rate system,¹¹ the data should be adjusted to a market-rate basis, to the extent possible. The market exchange rate is defined as an exchange rate determined by market forces; an official exchange rate is an exchange rate determined on an administered basis by the national authorities. Official exchange rates may be administered to keep them closely aligned with market exchange rates or, at the other extreme, may differ substantially from market exchange rates for extended periods of time.

Indexed financial instruments¹²

5.53 Indexed financial instruments are those for which the amounts of the interest payments (interest) or the principal outstanding or both are linked to an index. The indexation links the amount of the outstanding principal and/or interest to changes in a general price index, a specific price index, the price of a commodity, or an exchange rate index. The recording (separating out) of transactions and valuation changes depends on the type of index used to adjust the level of principal to which the interest is linked and on the currency in which the interest and principal are denominated.

5.54 The values of the price indicators are not known in advance. For financial instruments with indexation of the amount to be paid at maturity, they may be known only at the time of repayment. As a result, interest flows are uncertain before repayment and cannot be determined up front. For estimating interest accruals before the values of the reference indicators are known, some proxy measures will have to be used. In this regard, it is useful to distinguish the following three arrangements:

• a. Indexation of interest payments only with no indexation of amount to be paid at maturity.

• b. Indexation of the amount to be paid at maturity with no indexation of interest payments.

• c. Indexation of both the amount to be paid at maturity and interest payments.

5.55 When only interest payments are indexed, the full amount resulting from indexation is treated as interest accruing during the period covered by the coupon. It is most likely that by the time data are compiled for a reporting period, the date for the interest payment would have been passed and hence the value of index is known. When the date for the interest payment has not been passed, the movement in the index during that part of the reporting period can be used to calculate the interest accrual.

5.56 When the amount to be paid at maturity is index-linked, the calculation of interest accruals becomes uncertain because the redemption value is unknown. In some cases, the maturity time may be several years in the future.

5.57 When the amount to be paid at maturity is linked to a general or broad price index, the change in the value of the principal outstanding between the opening and closing stocks due to the movement in the relevant index is treated as interest accruing (transaction) in that period, in addition to any interest accruing from the coupon. In this case, interest accruing in an accounting period due to the indexation of the amount to be paid at maturity may be calculated as the change in the value of the amount outstanding between the end and beginning of the accounting period due to the movement in the relevant index.

5.58 When the amount to be paid at maturity is indexed to a specific, narrowly defined price index that includes a holding gain motive, the preferred approach is for interest accrual to be determined by fixing the rate of accrual at the time of issue. Accordingly, interest is the difference between the issue price and the market expectation, at inception, of all payments that the debtor will have to make, which is recorded as accruing over the life of the instrument. This approach records as income the yield-to-maturity at issuance, which incorporates the results of the indexation that are foreseen at the moment the instrument was created. Any deviation of the underlying index from the originally expected path is treated as holding gains or losses (valuation changes) that will not usually cancel out over the life of the instrument.

5.59 Financial instruments with both the amount to be paid at maturity and interest payments indexed to a foreign currency are treated as though they are denominated in that foreign currency. Thus, interest, other flows, and stock levels for these instruments should be calculated using the same principles that apply to foreign-currency-denominated instruments.¹³ Interest should accrue throughout the period using the foreign currency as the currency of denomination, with the flows converted to the domestic currency using midpoint market exchange rates. Similarly, the amount outstanding should be valued using the foreign currency as the unit of account, with the end-of-period exchange rate used to determine the domestic currency value of the instrument (including any accrued interest).

Aggregation

5.60 Aggregation is the summation of stocks or flows across institutional units. For example, for sectors and subsectors, financial assets and liabilities are aggregated into major categories—loans classified by debtor sectors and deposits classified by creditor sectors. Similarly, monetary and credit aggregates are the sum of major financial assets or liabilities across various sectors. Sectoral balance sheets—the underlying data sets for the monetary statistics described in Chapter 7—should be compiled as aggregated data of institutional units in the same subsector of the FCs sector.

Gross and net recording

5.61 Individual units may have the same kind of financial instrument both as an asset and as a liability—for example, a claim and a liability in the form of a debt security. Aggregation in which assets and liabilities are shown for their full values is referred to as gross recording.

5.62 This Manual, consistent with the 2008 SNA and other statistical manuals, follows gross recording for stocks. Specifically, claims on a particular institutional unit or group of units should not be netted against the liabilities to that unit or group. For example, a DC might have an outstanding loan to a customer who is also one of its depositors. The DC’s asset (i.e., the loan claim) should not be netted against the liability (i.e., the deposit of the borrower). Compilation on a net basis may be necessary due to the unavailability of source data on a gross basis. The need to resort to such netting is expected to be relatively rare for most categories of assets and liabilities in the FCs’ sector.

5.63 On the other hand, recording transactions on a purchases-less-sales basis (i.e., net acquisition of a specific category of financial assets or liabilities) should be used. For example, the amount of a particular category of debt securities purchased should be netted from the amount redeemed or sold during the period.

5.64 Further, some derived analytical measures in the analytical surveys described in Chapter 7 are presented on a net basis. The general principle for such presentation is that assets and liabilities are shown separately on a gross basis and net values are shown for analytical purposes. For example, the depository corporations survey (DCS) in Chapter 7 shows net foreign assets and net claims on central government. It also shows separately the stock and flow data for the asset and liability components that are being netted. The DCS shows claims on nonresidents and liabilities to nonresidents as the separate components of net foreign assets.

Debt defeasance

5.65 Debt defeasance allows a debtor (whose debts are in the form generally of debt securities and loans) to remove certain liabilities from the balance sheet by pairing irrevocably assets of equal value to the liabilities. This may be carried out either by placing the paired assets and liabilities in a trust account within the institutional unit concerned, or by transferring the paired assets and liabilities to another institutional unit. In the former case, no entry is recorded for defeasance and the assets and liabilities will not be excluded from the balance sheet of the unit. In the latter case, the assets and liabilities in question are moved to the balance sheet of the second unit as long as this unit is recognized as a separate institutional unit.

Consolidation

5.66 Consolidation is a method of presenting statistics for a set of units as if they constituted a single unit. Consolidation eliminates stocks and flows between institutional units, which are grouped into the same sector or subsector. Consolidation entails the “canceling out” of stocks and flows that arise from financial claims and corresponding liabilities between the institutional units within the financial sector or subsector covered by a particular survey.

5.67 An institutional unit consisting of a headquarters office and branch offices within the same economy should report stocks and flow data consolidated across all resident entities of the institutional unit. Financial flows and positions between institutional units should be reported on a gross basis for monetary and financial statistics. For sectors and subsectors, flows and stocks between constituent units should not be consolidated, as a matter of principle, at the level of data compilation and reporting. The sectoral balance sheets for the FCs subsectors and the FCs sector as a whole, in Chapter 7, are based on aggregated rather than consolidated data.

5.68 For analytical purposes, the survey data of the FCs subsectors and the financial corporations survey (FCS), as shown in Chapter 7, consolidate the data in the sectoral balance sheets. Intra-sectoral positions are consolidated in the respective surveys of FCs subsectors, while positions between FCs subsectors are consolidated in the FCS. The DCS in Chapter 7 is thus obtained by canceling out all financial flows and outstanding claims and liabilities between all DCs. The data presented are thus all stocks and flows of DCs that are claims on and liabilities to: (1) FCs subsectors other than the DCs subsector, (2) other domestic sectors, and (3) nonresidents. The DCS is compiled from the data in the central bank survey (CBS) and the other depository corporations survey (ODCS), which are compiled from the sectoral balance sheets for the central bank and the ODCs, respectively. To facilitate data consolidation at the survey level, the sectoral balance sheets and surveys underlying the DCS must contain comprehensive data on financial flows between DCs and the financial assets and liabilities that are outstanding among them.

Transactions

5.72 The transactions for each category of assets and liabilities can be derived residually, if data are available for OS, CS, VC, and OCVA. Transactions for the asset or liability category are then given by:

5.73 OCVA entries are unlikely for most financial asset and liability categories. Additionally, some financial assets and liabilities are not affected by revaluations. For these cases where OCVA = 0 and VC = 0, transactions are the only source of period-to-period change in the stocks; that is, T = CS – OS.

Revaluations

5.74 Assets and liabilities valued at market prices (or fair values) and/or denominated in foreign currency (Table 5.4) are expected to have non-zero values for revaluations. Market price changes affect negotiable instruments such as securities. Revaluations for each category of assets and liabilities can be derived residually based on equation 5.1, if data are available for OS, CS, T, and OCVA:

5.75 When using equation 5.3 to estimate revaluations for specific categories of securities, compilers need to be aware that the final results will depend on the valuation and other reporting practices. For example, the estimated revaluations may vary depending on the specific parameters used for calculating fair values.

5.76 The estimation method recommended in this Manual for foreign-currency-denominated financial assets and liabilities is a practical approach for approximating the revaluations that arise exclusively from exchange rate movements—specifically, for foreign-currency-denominated financial assets and liabilities that are measured at nominal value when expressed in the foreign currency units. Transactions and revaluations must be estimated whenever data are available for the sum of T and VC, but not for T and VC separately.

5.77 In the absence of direct data sources, foreign-currency-denominated transactions and valuation changes can be estimated on a currency-by-currency basis using the daily average exchange rate between the domestic currency and each foreign currency.¹⁴ If daily exchange rates are not available for all days in the period, the exchange rate or exchange rate average that is thought to most closely approximate the daily average for the period should be used.

5.78 Opening and closing stocks in domestic currency for a specific financial instrument are first converted into each foreign currency using market exchange rates on the balance sheet dates. Transactions are then calculated in foreign currency units as a difference between opening and closing stocks less any OCVA. The resulting transactions in foreign currency units are then converted into domestic currency units using the daily average market exchange rates for the period. Revaluations are estimated as a residual on the basis of equation 5.1.

5.79 Annex 5.1 provides detailed guidance and numerical examples on the estimation of transactions and revaluations from exchange rate movements. Two cases are discussed: (1) estimation in the absence of OCVA, and (2) estimation in the presence of OCVA.

Other changes in the volume of assets

5.80 Data for some OCVA entries should be available from an FC’s accounting records. The OCVA entries for an individual FC can be separated into those arising from extraordinary or infrequent events and those that are usually recorded on a regularly recurring basis. Many FCs are likely to experience few, if any, extraordinary events that give rise to asset losses that are to be posted to OCVA. In addition, an FC would be expected to have relatively infrequent OCVA entries that result from financial assets or liabilities being reclassified across financial instrument categories.

5.81 Concerning a change in a subsector classification of an FC, several sets of OCVA entries are needed (see also paragraph 5.21e). If an OFC is reclassified to the ODC subsector because it begins to issue liabilities that are included in the definition of broad money, OCVA entries arise in the accounts of the reclassified FC, as well as in the accounts of all FCs that have claims on (or liabilities to) the reclassified FC. These financial positions need to be reclassified as due from (or due to) an ODC, rather than an OFC. Reclassification from an OFC to an ODC is likely to occur relatively infrequently in most countries. When such reclassification occurs, the data for the OCVA entries should be directly available from the accounting records of the reclassified FC (see also paragraphs 7.38–7.39).

5.82 OCVA entries would also arise through the transfer of the reclassified FC’s data from the sectoral balance sheet of OFCs to the sectoral balance sheet of ODCs. These OCVA entries are made when the data reported by the individual FCs are aggregated into the sectoral balance sheets as part of the monetary statistics compilation that is described in Chapter 7 and, therefore, do not appear in the compilation of the data for the individual FC.

5.83 A special case of changes in sector classification of FCs and changes in classification of assets and liabilities arises in the context of currency union statistics when new countries join the union. For monetary statistics at the union level, the inclusion of data for entire FCs subsectors of a new member is recorded as OCVA. In addition, OCVA entries arise in the accounts of all the FCs of the monetary union countries that have claims on (or liabilities to) the residents of the new member country. All these financial positions need to be reclassified as due from (or due to) the appropriate sector of the union residents, rather than nonresidents.¹⁵

5.84 The main types of OCVA entries that FCs record on a regularly recurring basis are:

• a. Transfer of profit or loss from current year result to retained earnings within the liability account for equity and investment fund shares.

• b. Transfer (that is, appropriation) of retained earnings to general and special reserves within the liability account for equity and investment fund shares.

• c. Provisions (also referred to as allowances) for losses on financial assets (see paragraph 5.231).

• d. Write-offs of loans, securities, or other types of impaired financial assets.

5.85 It should be noted that although the treatment of the recurring types of OCVA in general is consistent with the 2008 SNA, OCVA entries discussed in the first three items of the preceding paragraph are specific to FCs and monetary statistics because of the different measurement of equity on the liability side of the balance sheet, and are not discussed in the 2008 SNA (see paragraph 5.167).

Monetary gold (central bank asset)

5.87 Holdings of both monetary and nonmonetary gold (nonfinancial assets) should be valued on the basis of the market price of gold prevailing on the balance sheet date, and revaluations should reflect changes in the value of monetary and nonmonetary gold. Monetary gold is to be valued at the price established in organized gold markets. In the world market, gold is priced by troy ounce. It is recommended that the midpoint between the bid-offer prices¹⁶ in the London gold market be used to value the closing stocks of gold. Gold prices quoted in U.S. dollars or another major currency should be translated into domestic currency units using the midpoint of the bid–offer spread for the market exchange rate. As the price of monetary gold is usually quoted in U.S. dollars or another major currency, the value of monetary gold is subject to holding gains and losses through changes in the exchange rate as well as the price of the gold.

5.88 Valuation of monetary gold at prices other than market prices or revaluation at longer than monthly frequency may be the practice used in source data. Supplementary data on the physical quantity of monetary gold should be provided to the compilers of monetary statistics so they can determine the gold prices used in the national valuation and can adjust the valuation, if necessary, to a market-price basis.¹⁷ Further, if for any reason monetary gold is not valued at market prices in monetary statistics, supplementary data should be disseminated on the physical quantity of monetary gold, including gold held in allocated gold accounts and unallocated gold accounts with nonresidents that give title to claim the delivery of gold.

5.89 Transactions in monetary gold should be valued at the actual prices at which the gold is bought or sold. A central bank sale (purchase) of monetary gold to (from) another central bank (or international financial institution such as the IMF) is recorded by both parties as a transaction in monetary gold. Transactions in gold bullion, excluding those among monetary authorities and international financial institutions, are treated as transactions in nonfinancial assets (nonmonetary gold). Transactions in nonmonetary gold are treated as acquisitions less disposals of nonfinancial assets.

5.90 When a monetary authority purchases gold bullion from institutional units other than monetary authorities or international financial institutions for inclusion in reserve assets the gold is monetized, resulting in a reclassification (OCVA) of gold bullion from a nonfinancial to a financial asset (monetary gold). If the monetary authority sells gold bullion that is part of reserve assets to institutional units other than monetary authorities or international financial institutions, the gold is demonetized, resulting in a reclassification of gold bullion from a financial asset to a nonfinancial asset before the transaction in nonfinancial assets is recorded (see also paragraph 5.21e).

SDR holdings (central bank asset) and SDR allocations (central bank liability)

5.91 SDR holdings of a central bank and SDR allocations received are denominated in SDRs, a unit of account created in 1969 by the IMF. The SDR exchange rate (usually referred to as the SDR rate)—the exchange rate between the SDR unit and the U.S. dollar—is determined daily by the IMF (and posted daily on the Internet at www.imf.org/external/data.htm#exchange) by summing the U.S. dollar value, based on market exchange rates, of a basket of five currencies (the Chinese renminbi, euro, Japanese yen, pound sterling, and U.S. dollar).¹⁸

5.92 SDRs are considered to be foreign currency in all cases, including for the economies that issue the currencies in the SDR basket. Any other currency units issued by an international organization, except in the context of a currency union, are considered foreign currency (see BPM6, paragraph 3.97).

5.93 The domestic currency value of stocks and flows for the SDR holdings/allocations are determined by converting the SDR amounts into U.S. dollar equivalents, using the SDR rate, followed by conversion of the U.S. dollar equivalents into domestic currency units, using the market exchange rate that prevailed between the domestic currency and the U.S. dollar at the end of the reporting period and on the date of the transaction.¹⁹

5.94 Main transactions in SDR (holdings and/or allocations) arise from (1) SDR purchases and sales between qualified SDR holders; (2) a new allocation or cancellation of SDRs by the IMF—a very infrequent event; (3) accrued interest receivable/payable on SDR holdings/allocations;²⁰ (4) member country payments of charges in SDRs to the IMF; (5) remuneration receipts in SDRs from the IMF on the reserve tranche position; (6) IMF purchases/repurchases and loan receipts/repayments in SDRs; and (7) interest receipts in SDRs on lending to the IMF.²¹ Stock and transaction data for SDR holdings/allocations should be available from the accounting department of the central bank (if the central bank is the designated fiscal agency) and need to be converted into the unit of account (see also Annex 4.2).

5.95 Valuation changes for SDR holdings/allocations can be derived residually from the data for opening and closing stocks and transactions. The holdings and allocations should be shown gross, rather than netted.

Currency

5.96 Domestic currency notes and coins are held by all FCs. The stock of domestic currency holdings of FCs is valued in nominal amount; therefore, revaluations are not applicable. OCVA for domestic currency holdings of an FC are rare, arising in exceptional circumstances such as when currency is destroyed during events such as wars, riots, or confiscation of an FC’s assets. Given VC = 0 and OCVA = 0, transactions are equal to the period-to-period changes in the stock of currency in circulation—that is, T = CS – OS.

5.97 Domestic currency appears as a liability, currency in circulation, in the sectoral balance sheet of the central bank. The central bank holds currency that, subsequent to issuance, has returned to the central bank by way of transactions with ODCs and possibly other institutional units. For monetary and financial statistics, the central bank accounts show only the liability, currency in circulation, which is defined as the currency outside the central bank.²² A related concept is currency outside DCs, defined as currency in circulation less ODCs’ holdings of domestic currency (cash in vaults).

5.98 Foreign currency holdings of FCs should be recorded at nominal value when expressed in foreign currency units and should be converted to domestic currency units on the basis of the market exchange rate prevailing on the balance sheet date.

5.99 Transactions in foreign currency are recorded at the exchange rate prevailing on transaction dates. For estimating revaluations, the approach explained in paragraph 5.78 should be applied. Transactions data on foreign currency holdings should be available from the foreign exchange records in the recording systems of FCs.

Deposits

5.100 Deposits (assets and liabilities) denominated in domestic currency are recorded at nominal value—that is, the amount of the outstanding deposit balance plus any accrued interest. The use of nominal values rather than market values is influenced by pragmatic concerns about data availability and the need to maintain symmetry between debtors and creditors. Another factor is because deposits are not intended for negotiability: without an active market, estimating a market price can be somewhat subjective. Nominal value is also analytically useful because it shows actual legal liability.

5.101 Transactions in deposits are recorded in the amount of net deposits (deposit placements less withdrawals) plus the accrued interest for the reporting period. Given that valuation changes do not apply to domestic-currency-denominated deposits, the amount of transactions in domestic currency equals the period-to-period change in deposits less any OCVA.

5.102 Stocks and flows of foreign-currency-denominated deposits are converted into domestic currency units as described in paragraph 5.50. If data are unavailable for both transactions and valuation changes, the daily average market exchange rate for the period can be used to estimate valuation changes, and provided there is no OCVA, transactions are the residual.

Debt securities

5.103 Stocks in debt securities are valued at market prices on the balance sheet date. Transactions in debt securities on the asset side of the balance sheet consist of: (1) securities purchases, less (2) securities sales, redemptions and interest payment receipts, plus (3) accrued interest earned in the period. Transactions in debt securities on the liability side consist of: (1) new securities issuances, less (2) securities redemptions (including partial redemptions) and interest paid,²³ plus (3) accrued interest incurred in the period. Stocks and transactions in foreign-currency-denominated securities follow the same valuation principles as explained in paragraph 5.50.

5.104 In source data, some debt securities may be valued at nominal rather than at market value. In the International Financial Reporting Standards (IFRSs), for example, all debt securities holdings are valued at market or fair values except for securities classified as held-to-maturity investments, which are valued at amortized cost using the effective interest method.²⁴ Liabilities in the form of debt securities are also valued at amortized cost, except for those designated as financial liabilities at fair value (including at market value) through profit or loss (see International Accounting Standard [IAS] 39.47 and IFRS 9, paragraph 4.2.1).

5.105 For monetary and financial statistics, assets and liabilities in debt securities (other than short-term) not valued at market price, need to be restated at market price. The difference in valuation between the source data and the market value recorded in monetary statistics is reflected in Equity liability [MS] as a valuation adjustment (see paragraph 5.43). Fair values need to be applied to the valuation of those debt securities that are traded infrequently, or are traded only in over-the-counter (OTC) markets for which market price quotations are not available on a regular basis. Fair value methods are discussed in paragraphs 5.44–5.48 and Box 5.1. Determination of fair value using the present value method should be possible for nearly all types of debt securities. However, contractual terms of some securities may be so complex (for example, with respect to multiple embedded derivatives features) that reasonable estimation of future cash flows and/or selection of a representative discount rate is impossible. It is recommended that these securities should be valued at acquisition price or amortized cost (if calculable). If market values for short-term securities are not available, nominal value could be considered an approximation of fair value, provided the market interest rates on these or similar securities have not changed significantly since their issuance.

5.106 Nominal value is recommended as a memorandum item for debt security liabilities to support consistency with debt measures.²⁵

Loans

5.122 Loans are outstanding from the time when funds are disbursed from the creditor to the debtor until the time when they mature or are liquidated prior to maturity—for example, because of early repayment or default by the debtor. Stock data for domestic-currency-denominated loans (assets or liabilities) are recorded at nominal value—that is, the creditor’s outstanding claim (equal to the debtor’s obligation), which comprises the outstanding principal amount including any accrued but not yet paid interest.

5.123 Like deposits, the use of nominal values is influenced by pragmatic concerns about the need to maintain symmetry between debtors and creditors. Loans also are by definition not traded and therefore estimating a market price can be subjective. Further, the nominal value of the loan is analytically useful because it represents the legal liability of the debtor. However, it is recognized that nominal value provides an incomplete view of the financial position, particularly when some loans are nonperforming. It is recommended that data on expected loan losses (disaggregated by debtor sector) be included as memorandum items accompanying the sectoral balance sheets described in Chapter 7. The expected realizable value of loans may be calculated based on the reported gross amounts of loans and expected loan losses (see also paragraph 5.142).

5.124 Loan transactions comprise the amount of new loans extended or received plus accrued interest on loans less loan principal and interest payments. Transactions in loans denominated in domestic currency are equal to the period-to-period change in loans outstanding (that is, CS – OS) less OCVA (such as arising from loan write-offs). The case of loan repayment after the loan has been written-off is discussed in paragraph 5.231c.

5.125 Stocks and transactions of foreign-currency-denominated loans are converted to domestic currency units as described in paragraph 5.50. Using the data for opening and closing stocks and OCVA, data for the sum of transactions and valuation changes (arising from exchange rate changes) can be derived residually (see Annex 5.1).

5.126 The entire loan portfolio is to be valued at nominal value when presenting the loan data in the sectoral balance sheets described in Chapter 7. In particular, outstanding loans should not be adjusted for provisions for loan losses. A loan portfolio is adjusted downward only when: (1) loans are written off as uncollectible (OCVA), or (2) when the outstanding amount of a loan has been reduced through formal debt reorganization (revaluation or a transaction if it is debt forgiveness, as explained in the next paragraph).

5.127 For domestic-currency-denominated loans, valuation changes arise in the exceptional cases of debt refinancing or debt swaps (e.g., for debt for equity swaps), or when a loan is sold at below (or above) its nominal value.³¹ Revaluation is recorded for the debt being replaced prior to its replacement by a new instrument such as: (1) a new loan to the original debtor (loan refinancing); or (2) securities issued by the original debtor (loan swap for securities) or by a new debtor (combination of a loan assumption and swap). In other words, debt refinancing and debt swaps transactions are recorded at the value of the new instrument, with revaluation recorded for the original instrument equal to the difference between the value of the new instrument and the value of the instrument being replaced. An exception arises for nonmarketable debt owed to official creditors when the difference in value is intended to convey a benefit to the debtor—the difference in value is then recorded as a debt forgiveness transaction (see subsection Recording of Debt Reorganizations in this section and BPM6, Appendix 2).

5.128 When a loan is sold at below (above) nominal value, the transaction is recorded at the transaction value and the position is recorded at nominal value. To account for the inconsistency between the market valuation of transactions and nominal valuation of positions, the seller records a revaluation during the period in which the sale occurs, equal to the difference between the nominal and the transaction value, while the buyer records an opposite amount as a revaluation.³² Such revaluations directly impact Equity liability [MS] through valuation adjustment.

5.129 The transaction date (trade date) for a loan is the date on which the funds are disbursed from the creditor to the debtor, even though the loan agreement may be signed on an earlier date. The trade date and settlement date are the same in this case.³³

5.130 For loans to finance specific projects, loan disbursements can take the form of:

• a. Advances to the borrowing entity—to be recorded when the lender advances funds to the borrower.

• b. Direct payment by the lender to suppliers of goods and services—to be recorded when the lender pays the supplier.

• c. On a reimbursement basis after the borrower has already paid the suppliers—to be recorded when the lender makes reimbursements to the borrower.

5.131 Loans that have become negotiable (i.e., marketable) in secondary markets should be reclassified as debt securities (see paragraph 4.59) and should be valued on the basis of market prices in the same way as other types of debt securities.

5.132 For loan participations, transactions comprise the principal amount of new participations less principal and interest payments plus accrued interest. For mortgage loans, transactions are recorded in the amount of new loans less principal and interest payments plus accrued interest. Principal payments for mortgage loans include the principal components of the scheduled payments during the term of the loan, as well as prepayments—repayment of loans prior to maturity.³⁴

5.133 Financial lease payments are treated as interest and principal payments on a loan by the lessee to the lessor. Financial leases are often structured similar to the interest and principal payment schedules for a loan that calls for periodic payments in equal amounts over the term of the loan. The rate of interest equates the present value of the total amount payable in installments over the life of the lease (including any value to be repaid at maturity) with the market value of the asset at the time the lease is initiated.

5.134 Unlike a mortgage or installment loan, a financial lease may stipulate that (1) the first lease payment is to be made at the inception of the lease, (2) the periodic payments are not all of equal amount, and/or (3) a lump sum payment is required at the termination of the lease, if the lessee is to acquire the asset. If the lessee acquires the legal ownership of the leased asset, the payment for the residual value is included in the last lease payment. If the lessee returns the asset to the lessor at the end of the lease, this is recorded as a transaction in the amount of the residual value of the asset (the final payment under the lease arrangement) and an acquisition (lessor)/disposal (lessee) of a nonfinancial asset. Most financial leases are net leases in which the lessee pays any operating expenses and property tax and agrees to maintain and insure the asset.

5.135 For those loans (or deposits) for which the contract requires the accrual of interest during the grace period (i.e., the relevant interest rate that applies to the grace period is greater than zero), the accrual of interest should be recorded as increasing the value of the principal. On the other hand, if the debtor can repay the same amount of principal at the end of the grace period as at the beginning (i.e., the relevant interest rate that applies to the grace period is zero), no interest costs accrue during the grace period. This treatment applies to loans and deposits but not to debt securities.³⁵

5.136 Box 5.4 further elaborates on statistical treatment of different types of loans.

Equity and investment fund shares

5.149 In the financial statistics, equity and investment fund shares—whether held as assets or issued as liabilities⁴⁰—are recorded at market or fair values. The total value of the shares of a corporation is equal to the market price (or fair value) per share times the number of shares issued and currently outstanding.

5.150 In monetary statistics, equity and investment fund shares held as assets are recorded at market value, as are investment fund shares issued as liabilities. Equity liabilities of FCs other than investment funds are recorded at their book value, which corresponds to the difference between total assets and total liabilities. This treatment ensures the balance sheet identity between assets and liabilities in the data reported by FCs.

5.151 Equity and investment fund shares held as assets denominated in foreign currency are recorded at the market or fair value expressed in foreign currency and are converted to domestic currency units as described in paragraph 5.50.⁴¹

5.152 Transactions in shares (equity securities) assets are reported on a purchases-less-sales basis. Transactions in shares on the liability side of an FC’s balance sheet consist of the proceeds from owners’ contributions, including issuance of new shares,⁴² less any outflow of dividends when shares go ex-dividend.

5.153 Transactions in other equity (defined in paragraph 4.126) are principally in the form of owners’ net additions to the equity of quasi-corporations—that is, funds or other resources (including fixed or other assets) that the owners provide for capital investment by quasi-corporations less withdrawals, where the withdrawals are proceeds from the sale of fixed or other assets, transfers of fixed or other assets, and funds taken from accumulated savings and reserves for the consumption of fixed capital. For quasi-corporations, all equity (including retained earnings and reserves) is assumed to be held by the owners.⁴³ Equity withdrawals exclude current withdrawals from the income of quasi-corporations.

5.154 For their foreign branches, FCs may inject significant financial support in certain circumstances. Such financial support may take various forms and its economic substance may also vary. These payments should be recorded as transactions in financial instruments used to provide financial support. In cases where there is no clarity on the type of financial instrument used, the payments could be recorded as transactions in loans.

5.155 Transactions in shares are valued at the price agreed between the institutional units involved in the transaction. New shares are recorded at issue value. Transactions in foreign-currency-denominated shares and other equity are converted to domestic currency units at the market exchange rates prevailing at the time of the transaction.

5.156 Current and capital transfers⁴⁴ received and provided by FCs are treated as transactions affecting Equity liability [MS].⁴⁵ The receipt of a current or capital transfer is recorded as a transaction: an increase in currency or deposits (or nonfinancial assets) on the asset side of the FC’s balance sheet, or as a reduction in a liability (in case of debt forgiveness). The contra entry is an increase in Equity liability [MS] of the FC in Current year result. The provision of a current or capital transfer is also recorded as a transaction: a decrease in currency or deposits (or nonfinancial assets) on the asset side of the FC’s balance sheet, with a contra-entry in Equity liability [MS] in Current year result.

Purchase of own shares

5.157 Corporations sometimes purchase or buy back their own shares. In financial statistics, the total value of an FC’s equity shares is equal to the market price per share times the number of outstanding shares other than those reacquired and held by the FC. In monetary statistics, reacquired shares (called treasury shares) should be recorded as a transaction in Equity liability [MS] at the market value, with contra-entries recorded as a reduction in currency or deposit holdings, as shown in Table 5.7.⁴⁶

Table 5.7

Recording of Reacquired Shares in Monetary Statistics: An Example

¹Funds contributed by owners represent the book value of 500 shares at 1.5 per share.

²Buy-back of 40 shares at a market price of 5.63 (5.63*40 = 225.2).

³Buy-back of 40 shares at book value of 1.5 (1.5*40 = 60.0).

⁴The difference between the market and book values of the reacquired shares (225.2 – 60.0 = 165.2).

Note: OS = opening stock; T = transactions; VC = valuation changes; OCVA = other changes in the volume of assets; CS = closing stock.

Table 5.7

Recording of Reacquired Shares in Monetary Statistics: An Example

(In domestic currency units)			OS	T	VC	OCVA	CS
Assets
	Transferable deposits		1,500.0	−225.22			1,274.8
Liabilities
	Equity liability [MS]
		Funds contributed by owners1	750.0	−60.03			690.0
		Retained earnings	400.0	−165.24			234.8

¹Funds contributed by owners represent the book value of 500 shares at 1.5 per share.

²Buy-back of 40 shares at a market price of 5.63 (5.63*40 = 225.2).

³Buy-back of 40 shares at book value of 1.5 (1.5*40 = 60.0).

⁴The difference between the market and book values of the reacquired shares (225.2 – 60.0 = 165.2).

Note: OS = opening stock; T = transactions; VC = valuation changes; OCVA = other changes in the volume of assets; CS = closing stock.

View Table

Table 5.7

Recording of Reacquired Shares in Monetary Statistics: An Example

(In domestic currency units)			OS	T	VC	OCVA	CS
Assets
	Transferable deposits		1,500.0	−225.22			1,274.8
Liabilities
	Equity liability [MS]
		Funds contributed by owners1	750.0	−60.03			690.0
		Retained earnings	400.0	−165.24			234.8

¹Funds contributed by owners represent the book value of 500 shares at 1.5 per share.

²Buy-back of 40 shares at a market price of 5.63 (5.63*40 = 225.2).

³Buy-back of 40 shares at book value of 1.5 (1.5*40 = 60.0).

⁴The difference between the market and book values of the reacquired shares (225.2 – 60.0 = 165.2).

Note: OS = opening stock; T = transactions; VC = valuation changes; OCVA = other changes in the volume of assets; CS = closing stock.

Insurance, pension, and standardized guarantee schemes

5.178 The liabilities of insurance, pension, and standardized guarantee schemes (IPSGS) and their counterpart assets should be valued in principle at market value. The specific methods of valuing these liabilities are described below. Reinsurance should be treated in the same way as direct insurance. Although under the IFRSs and national financial reporting standards data adjustment may be required for the valuation of some types of pension plan assets, compilers of monetary statistics need to adjust the data to reflect market or fair values of all respective financial assets that should be market-valued.

5.179 Liabilities in the form of life insurance, and annuities and pension entitlements are measured as the present value of amounts expected to be paid out (based on actuarial assumptions for defined benefit arrangements). Measurement of life insurance and pension plan benefits both involve assumptions of an actuarial nature. Most insurance corporations and pension funds have in-house actuarial capabilities for the estimation of life insurance entitlements and post-employment benefits.

5.180 In some countries, expected post-employment (pension) obligations are revalued on a relatively infrequent basis (e.g., every three years or even less frequently). This Manual recommends that revaluation should occur at least annually, including for life insurance entitlements.

Financial derivatives and employee stock options

5.200 This section contains the principles and approaches for the valuation of the most common types of financial derivatives. Financial derivative contracts with more complex features—including those often called exotic—can be valued through modification or extension of the derivative pricing approaches described in this section.

5.201 For a more detailed discussion of the recording of financial derivatives, including different pricing models, see Annex 5.3. In practice, compilers are constrained to values as reported by the respondents based on their own accounts, who in calculating fair values of financial derivatives often use model-based valuation methods.

5.202 The following principles should be followed in the recording and valuation of financial derivatives in monetary and financial statistics:

• a. Recognize the exchange of claims and obligations at the inception of a derivative contract as a financial transaction creating asset and liability positions that usually have, at inception, zero value if the instrument is a forward and a value equal to the premium if the instrument is an option.

• b. Treat any changes in the market or fair values of derivatives as valuation changes (holding gains or losses).

• c. Record secondary market transactions in traded derivatives, such as options, as transactions.

• d. Record any payments made at settlement as transactions in financial derivative assets or liabilities.

• e. Record, in the sectoral balance sheets, stock positions in financial derivatives at market or fair values.

5.203 Based on the preceding principles, financial derivatives (both exchange-traded and OTC) and employee stock options (ESOs) are valued at market prices prevailing on balance sheet recording dates, whenever a price quotation in a liquid market is available for the reference date. Fair value methods (such as present values or option models) need to be applied whenever market price quotations for the financial derivatives are unavailable or unrepresentative of a liquid market.⁶¹

5.204 Positions of the same type of financial derivative held as both a financial asset and a liability are presented gross on the asset and liability sides, respectively, of the FCs’ balance sheet. Gross asset and gross liability data should be compiled by summing, respectively, the values of all individual contracts in asset positions and the values of all individual contracts in liability positions. This should not be understood as recording the notional amounts of the underlying assets.

5.205 Some options and forwards operate with margin payments, such as futures, where gains or losses are settled daily. In these cases there will not be any entries for financial derivatives at the end of each day in the balance sheets, as the value of financial derivatives will be zero. However, transactions to settle the daily gain/loss will be recorded.

5.206 Commissions and fees paid—at inception or during the lives of derivatives—to banks, brokers, and dealers are classified as payments for services. These payments are for services provided within current periods and are independent of asset and liability relationships created by the derivatives.⁶²

5.207 A key characteristic of many derivative contracts is that the counterparties make commitments to transact, in the future and at agreed prices, in underlying items. The present value (or market price) of a financial derivative is derived from the difference between the agreed contract price of an underlying item and the prevailing market price (or the market price expected to prevail), appropriately discounted, for that item. Different recording and valuation principles of the two broad types of financial derivatives—forward-type contracts and options—stem from their basic characteristics.

5.208 The exchange of claims and obligations at the inception of a derivative contract, as well as secondary market transactions in financial derivatives are recorded as transactions, including any payments made at settlement (see also paragraph 5.202) and receipts/payments of nonrepayable margins. For transactions in foreign-currency-denominated financial derivatives the same principles as explained in paragraph 5.49 apply.

Other accounts receivable/payable

Nonfinancial assets

5.232 Stock positions and flows of financial assets and liabilities of FCs are the primary focus of monetary and financial statistics. Nonetheless, accurate data on nonfinancial assets (as defined in Annex 8.1, paragraphs 8.102–8.104) are required for completing the stock and flow data in the balance sheet framework of monetary statistics. The recommendation is that the valuation of produced and nonproduced nonfinancial assets should be at market value on the balance sheet date consistent with SNA principles.

5.233 In practice, source data as compiled in accordance with national financial reporting standards often use other methods of valuation. In the national financial reporting standards of many countries, depreciation allowances are not representative of the consumption of fixed capital, which is the economically meaningful concept that the 2008 SNA specifies for the estimated opportunity costs of using fixed assets. Depreciation allowances for fixed assets may be based primarily on tax and economic policy considerations, rather than on the useful lives of the nonfinancial assets and their replacement costs.

5.234 Accurate data on the production, acquisition, disposal, and consumption of nonfinancial assets are needed for analysis of the linkages between the financial account and the other accounts (in particular, the capital account) of the 2008 SNA. In addition, stock data for nonfinancial assets are needed for the 2008 SNA sectoral balance sheets that contain accounts for both financial and nonfinancial assets (see Chapter 8). Nonfinancial assets should be valued in monetary and financial statistics consistent with the needs of the national accounts, which may be difficult in practice given that in the source data for monetary and financial statistics, nonfinancial assets are usually recorded at acquisition cost rather than at market or fair value.