1. Cancellation and write-offs

9.8 A number of circumstances may lead to reduction or cancellation, by other than normal repayment, of liabilities. Debt assumption and debt forgiveness involve transactions and are discussed in paragraphs 8.42–8.45 and 13.22–13.23, respectively. Valuation changes associated with debt reorganization are dealt with in paragraph 9.29. Debt reorganization and related issues are discussed in more detail in Appendix 2.

9.9 Changes in claims resulting from write-offs are excluded from the financial account. Specifically, a creditor may recognize that a financial claim can no longer be collected because of bankruptcy or other factors and it may remove the claim from its balance sheet.¹ This recognition (by the creditor) should be accounted for as other changes in volume of assets. (The corresponding liability should also be removed from the balance sheet of the debtor.)

9.10 Unilateral cancellation of a financial claim by a debtor (debt repudiation) is not recognized. Debt forgiveness, which is a capital transfer, usually concerns government debt; most commercial situations where the impossibility of debt collection is recognized by the creditor are treated as write-offs.

9.11 Governments or other institutional units may take possession of the assets of other institutional units, including nonresident units, without full compensation for reasons other than the payment of taxes, fines, or similar levies. If the compensation falls substantially short of the values of the assets as shown in the balance sheet, the difference should be recorded in other changes in volume as an increase in assets for the institutional unit doing the seizing and a decrease in assets for the institutional unit losing the asset. Such actions are called uncompensated seizures of assets in the 2008 SNA. For seizures between residents and nonresidents relating to nonfinancial assets, a supplementary item can be recorded.

9.12 If an employee stock option is extinguished between the grant and vesting dates (e.g., if the employee departs) without an agreed settlement between the parties, an other change in volume is recorded (namely, a loss of an asset by the employee and a reduction of liabilities by the employer).

2. Reclassifications

9.13 A reclassification entry is necessary when a financial asset or liability changes its characteristics or status without there having been a cross-border transaction. In contrast to reclassifications, other cases—such as changes such as conversion of a convertible bond (see paragraph 8.29) and exercise of a warrant (see paragraph 5.87)—are shown as transactions involving repayment of the original instrument and creation of a new one because they arise from bilateral agreements.

3. Financial assets and liabilities of persons and other entities changing residence

9.21 The conditions under which entities can change their economy of residence were discussed in Chapter 4. When persons and other entities change their economy of residence, their existing financial assets and liabilities are added to or removed from the IIP through a reclassification, not by imputing transactions in the balance of payments. The change in the residence does not involve a transaction between two entities, but a change in the status of a single entity. Because of the treatment of ownership of land and buildings, as well as certain other cases (discussed in paragraphs 4.34–4.40), notional units may be created or eliminated as a result of the change in residence status of an owner. The treatment of change in residence applies to all the financial assets and liabilities, not just those that are shifted to the new economy of residence.

9.22 In addition to change in the status of existing assets, new financial claims and liabilities may be created by transactions around the time of change of residence. For example, new bank accounts may be created in the new economy of residence. In those cases, the treatment is determined by the residence status of the owner at the time of the transaction. If the relation of the timing of the transaction and the change of residence is unknown or effectively simultaneous, a convention can be adopted, such as that the change of residence occurs first.

9.23 Corporations sometimes change residence. Most cases labeled as corporate migration involve moving assets between entities (see paragraph 8.19 on corporate inversion). However, in the exceptional case when corporate change of residence occurs (see paragraph 4.167), the change in the residence of the owner of financial assets and liabilities is treated as a reclassification, in the same way as a change of residence of individuals.

4. Insurance reserves, pension entitlements, and provisions for standardized guarantee schemes

9.24 Changes in model assumptions can give rise to other changes in the volume of insurance reserves, pension entitlements, and provisions for standardized guarantee schemes. For an annuity, the relationship between premiums and benefits is usually determined when the contract is entered into, taking account of mortality data available at that time. Any subsequent changes will affect the liability of the annuity provider towards the beneficiary, with the consequent changes in provisions recorded as other changes in volumes. In contrast to changes in model assumptions, changes in pension entitlements negotiated between the parties are transactions, so would be classified as current or capital transfers.

1. Debt reorganization

9.29 A debtor and creditor may change the terms of a debt agreement. The terms may be changed such that the value of the new claim differs from the value of the old claim. In commercial situations, differences in values between old and new claims are generally treated as a valuation change. Debt cancellation and write-offs are other volume changes and were discussed in paragraphs 9.8–9.11. However, as noted in paragraph 13.23, if there is an intention to convey a benefit, the change may be treated as a capital transfer. Debt reorganization is discussed in further detail in Appendix 2.

2. Financial derivatives and employee stock options

9.30 The exchanges of claims and obligations at the inception of a derivative contract are financial transactions creating asset and liability positions that normally have, at inception, zero value if the instrument is a forward-type contract and value equal to the total premium payable if the instrument is an option. Changes in the value of derivatives due to change in the underlying item are recorded as revaluation. (Changes in the value of derivatives to or from zero are classified as revaluation, not economic appearance or disappearance of assets.) The settlement of a financial derivative position is a transaction, recorded in the financial account. Changes in the values of employee stock options at or after the vesting date are revaluations (see paragraphs 3.59, 7.39, and 11.20). (In practice, it may be feasible to recognize the revaluation only at exercise date.)

9.31 Financial derivatives that include a foreign exchange risk are a case where the steps for separating exchange rate and other revaluation, as stated in paragraph 9.28, are not applicable. In those cases, a valuation change due to exchange rate changes can arise even in the currency of denomination of the instrument. In some cases, such as cross-currency swaps that are also interest rate swaps, it may not be practical to separate exchange rate changes from other revaluation, so a convention that all revaluation effects are due to exchange rate effects may be adopted.

3. Implications of different treatments of retained earnings

9.32 In cases where retained earnings are not imputed as being payable to the owners, these earnings contribute to revaluation. The SNA and international accounts have two treatments for retained earnings:

• For direct investors’ equity in their direct investment enterprises and for investment fund shares, retained earnings are imputed as being payable to the owners and reinvested as an increase in their equity. (The primary income account entries are discussed in paragraphs 11.33–11.47; the corresponding financial account entries in paragraphs 8.15–8.16 and 8.28.) Similarly, insurance and pension fund reserves and provisions for calls under standardized guarantees include property income attributed to policyholders. (The primary income account entries are discussed in paragraphs 11.77–11.84.)

• In other cases of equity, there is no imputation of income or financial account transactions to the owners on account of retained earnings. The result is that the increase in the value of the equity caused by the accumulation of retained earnings is reflected in increased value in the IIP without a transaction and is, therefore, shown as a result of revaluation.

Box 9.1.

Example of Calculation of Revaluation Due to Exchange Rate Changes

The steps are described in paragraph 9.28. The data in normal text are given; the data in bold are derived.

Step 1. Derivation of other revaluation in terms of the currency of denomination of the instrument (in this case, €):

Other revaluation can be derived as 8, i.e., 50 (end of period position) – 30 (beginning of period position) – 12 (net transactions) – 0 (other volume changes) = 8.

Step 2. Conversion of currency of denomination to the currency used for compilation of international accounts statistics (in this case from € to domestic currency):

Beginning of period positions are multiplied by 2; flows by 2.5 (rate derived as the average rate on the period); and end of period positions by 3.

Step 3. Derivation of exchange rate changes in the currency used for compilation of international accounts statistics: For the bonds denominated in €, revaluation due to exchange rate changes can be derived as 150 (end of period position) – 60 (beginning of period position) – 30 (net change due to transactions) – 20 (net change due to other revaluation) = 40.

(Use of average exchange rates in Step 2 is an approximation, as discussed in Step 2 of paragraph 9.28. Preferably, exchange rates at the time of the event would be used.)

	Beginning of period position	Net transactions during period	Other volume changes	Step 1 other revaluations	Revaluation due to exchange rate changes	End of period position
Values in currency of denomination:
Bonds denominated in € (in €)	30	12	0	8	0	50
Exchange rate (domestic currency per €)	2	2.5		2.5		3
Values in currency of compilation:	Step 2	Step 2	Step 2	Step 2	Step 3	Step 2
Bonds denominated in € (in dom. curr.)	60	30	0	20	40	150

(Use of average exchange rates in Step 2 is an approximation, as discussed in Step 2 of paragraph 9.28. Preferably, exchange rates at the time of the event would be used.)

View Table

	Beginning of period position	Net transactions during period	Other volume changes	Step 1 other revaluations	Revaluation due to exchange rate changes	End of period position
Values in currency of denomination:
Bonds denominated in € (in €)	30	12	0	8	0	50
Exchange rate (domestic currency per €)	2	2.5		2.5		3
Values in currency of compilation:	Step 2	Step 2	Step 2	Step 2	Step 3	Step 2
Bonds denominated in € (in dom. curr.)	60	30	0	20	40	150

(Use of average exchange rates in Step 2 is an approximation, as discussed in Step 2 of paragraph 9.28. Preferably, exchange rates at the time of the event would be used.)

4. Implications of trading of instruments that are recorded at nominal values in positions

9.33 Nominal valuation is used for positions in nonnegotiable instruments, namely loans, deposits, and other accounts receivable/payable (see paragraphs 7.40–7.44). However, when transactions in these instruments do occur, they are valued at market prices (see paragraph 8.12), with transaction prices often being less than the nominal values, because the market price takes account of the possibility of default. To account for the inconsistency between the market valuation of transactions and nominal valuation of positions, the seller records other price changes during the period in which the sale occurs, equal to the difference between the nominal and the transaction value and the buyer records an opposite amount as other price changes.

5. Implications of treatment of interest

9.34 Any indexation amounts not included in interest are classified as revaluation. The treatment of interest on index-linked instruments is discussed in more detail in paragraphs 11.59–11.65.

9.35 Revaluation arises from changes in market yields on fixed-interest debt securities. The value of interest is determined by the yield to maturity at inception (see paragraphs 11.52–11.53), so the effect of any subsequent change in the value of the security due to changes in market interest rates is classified as being due to revaluation.