Chapter

9. Transactions in Financial Assets and Liabilities

Author(s):
International Monetary Fund
Published Date:
December 2001
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This chapter describes transactions in financial assets and liabilities and their classification.

A. Introduction

9.1Chapter 7 describes the balance sheet and the assets and liabilities recorded on it. As an integrated system, the GFS system also includes the flows necessary to explain all changes between the balance sheet at the end of one period and the balance sheet at the end of the next period. As described in Chapter 3, there are two types of flows—transactions and other economic flows—both of which can affect stocks of assets and liabilities. This chapter describes the transactions that affect holdings of financial assets and liabilities, and Chapter 10 describes other economic flows, all of which affect holdings of assets and liabilities.

9.2 The accounting identity given in paragraph 8.2 of Chapter 8 for nonfinancial assets also holds for financial assets and liabilities.1 It states that

The value of a category of financial assets (liabilities) on the balance sheet at the beginning of an accounting period.

plus

The total value of that category of assets (liabilities) acquired (incurred) in transactions during the accounting period.

minus

The total value of that category of assets (liabilities) disposed of (extinguished) in transactions during the accounting period.

plus

The net value of other economic flows that affect that category of assets (liabilities).

equals

The value of the category of assets (liabilities) on the balance sheet at the end of the accounting period.

This identity requires that transactions, other economic flows, and stocks be recorded consistently with regard to time of recording and valuation. The accounting rules governing these factors are described in Chapter 3.

9.3 Transactions can change stocks of financial assets or liabilities in different ways and all must be accounted for. The more important types of transactions follow:

  • Existing assets of all types can be acquired from other units by purchase, barter, payment in kind, or transfer. The same transaction is a disposal of an asset from the viewpoint of the other unit.

  • New financial claims are often created by transactions in which a creditor advances funds to a debtor. The creditor then owns a financial asset and the debtor incurs a liability.

  • Financial claims are normally terminated by transactions. In some cases, the debtor pays the creditor the funds stipulated by the financial instrument, thereby canceling the claim. In other cases, the debtor buys its own instrument in the market.

  • Accrued interest is deemed to be reinvested in an additional quantity of the underlying financial instrument by means of a transaction.

  • The settlement of a financial derivative may involve two transactions: the termination of the financial claim and the sale of an underlying item from which the derivative obtained its value.

9.4 All transactions that increase a unit’s holdings of assets are labeled acquisitions. All transactions that decrease a unit’s holdings of assets are labeled disposals. Transactions that increase liabilities are referred to as the incurrence of a liability. Transactions that decrease liabilities are variously titled repayments, reductions, redemptions, liquidations, or extinguishments. Thus, the results of transactions in a particular category of financial assets can be presented either as total acquisitions and total disposals or as net acquisitions. Similarly, changes in liabilities can be presented as total incurrences and total reductions or as net incurrences. Transactions that change a category of financial assets are never combined with transactions that change the same category of liabilities. That is, the net acquisition of loans would never refer to the increase in loans held as financial assets less the increase of loans as liabilities.

9.5 The remainder of this chapter describes first the valuation, time of recording, and netting of transactions that affect financial assets and liabilities and then details on transactions that affect specific categories of financial assets and liabilities.

B. Valuation

9.6 The value of an acquisition or disposal of an existing financial asset or liability is its exchange value. The value of a newly created financial claim is generally the amount advanced by a creditor to a debtor.

9.7 All service charges, fees, commissions, and similar payments for services provided in carrying out transactions and any taxes payable on transactions are excluded from transactions in financial assets and liabilities. They are expense transactions. In particular, when new securities are marketed by underwriters or other intermediaries as agents for the unit issuing the securities, the securities should be valued at the price paid by the purchasers. The difference between that price and the amount received by the issuing general government unit is a payment for the services of the underwriters.

9.8 When a security is issued at a discount or premium relative to its contractual redemption value, the transaction should be valued at the amount actually paid for the asset and not the redemption value. Any interest that is prepaid jointly with the acquisition of a security should be treated as accrued interest that had been reinvested in an additional quantity of the security. In this case, the value of the acquisition is the sum of the amount paid for the security directly plus the amount prepaid for accrued interest. It is recognized, however, that interest accruing on deposits and loans may have to follow national practices and be classified under accounts receivable.

9.9 Not all financial assets have prices as the term is normally understood. Financial assets denominated in purely monetary terms, such as cash and deposits, do not have physical units with which prices can be associated. In such cases, the relevant quantity unit is effectively a unit of the currency itself so that the price per unit is always unity. In the case of nontransferable financial assets, such as some loans, the monetary value is the amount of principal outstanding. Thus, the term “price” has to be used in a broad sense to cover the unitary prices of assets such as cash, deposits, and loans as well as conventional market prices.

9.10 In some cases, the value of a financial asset is determined by the value of the counterpart to the transaction. For example, the initial value of a loan resulting from a financial lease is the value of the nonfinancial asset leased. The value of an account payable resulting from the purchase of goods or services is the value of the goods acquired or services received.

9.11 The value of a transaction expressed in a foreign currency is converted to the domestic currency using the midpoint of the buying and selling exchange rates at the time of the transaction. If a transaction expressed in a foreign currency involves the creation of a financial asset or liability, such as accounts payable/receivable, and is followed by a second transaction in the same foreign currency that extinguishes the financial asset or liability, then both transactions are valued at the exchange rates effective when each takes place.

9.12 Government units may acquire or dispose of financial assets on a nonmarket basis as an element of their fiscal policy rather than as a part of their liquidity management. For example, they may lend money at a below-market interest rate or purchase shares of a corporation at an inflated price. Although such transactions involve a transfer component, they are often structured so that the market price is not clear. If the market value can be determined, then the transaction should be valued at that amount and a second transaction should be recorded as an expense to account for the transfer. Otherwise, the value of the transaction should be the amount of funds exchanged.

C. Time of recording

9.13 Transactions in financial assets and liabilities are recorded when ownership of the asset changes, when the asset is created or liquidated, or when the addition or reduction in the amount of the financial instrument is made. This time is usually clear when the transaction involves an exchange of existing financial assets or the simultaneous creation or extinction of a financial asset and a liability. In most cases, it will be when the contract is signed or when money or some other financial asset is paid by the creditor to the debtor or repaid by the debtor to the creditor.

9.14 In some cases, the parties to a transaction may perceive ownership to change on different dates because they acquire the documents evidencing the transaction at different times. This variation usually is caused by the process of check clearing or the length of time checks are in the mail. The amounts involved in such “float” may be substantial in the case of transferable deposits and other accounts receivable or payable. If there is disagreement on a transaction between two general government units or a government unit and a public corporation, the date on which the creditor records the transaction is the date of record because a financial claim exists up to the point that the payment is cleared and the creditor has control of the funds.

9.15 When a transaction in a financial asset or liability involves a nonfinancial component, the time of recording is determined by the nonfinancial component. For example, when a sale of goods or services gives rise to a trade credit, the transaction should be recorded when ownership of the goods is transferred or when the service is provided. When a financial lease is created, the loan implicit in the transaction is recorded when control of the fixed asset changes.

9.16 Some transactions, such as the accrual of interest expense and its borrowing as an additional quantity of the financial instrument, take place continuously. In this case, the transaction in the associated financial asset or liability also takes place continuously.

D. Netting and consolidation of flows

9.17 Transactions in financial assets and liabilities are presented in Table 9.1 as the net acquisition of each category of financial asset and the net incurrence of each category of liability. That is, only the net change in the holding of a type of asset is presented, not gross acquisitions and gross disposals as with most nonfinancial assets. (Separate amounts for gross acquisitions and gross disposals may, of course, be presented if the underlying accounting records permit and the information is meaningful.) When the same type of financial instrument is held both as a financial asset and a liability, transactions in financial assets are presented separately from transactions in liabilities rather than netting transactions in liabilities against transactions in financial assets.

Table 9.1:Net Acquisition of Financial Assets and Net Incurrence of Liabilities Classified by Financial Instrument and Residence
32Financial assets33Liabilities
321Domestic331Domestic
3212Currency and deposits3312Currency and deposits
3213Securities other than shares3313Securities other than shares
3214Loans3314Loans
3215Shares and other equity3315Shares and other equity (public corporations only)
3216Insurance technical reserves3316Insurance technical reserves [GFS]
3217Financial derivatives3317Financial derivatives
3218Other accounts receivable3318Other accounts payable
322Foreign332Foreign
3222Currency and deposits3322Currency and deposits
3223Securities other than shares3323Securities other than shares
3224Loans3324Loans
3225Shares and other equity3325Shares and other equity (public corporations only)
3226Insurance technical reserves3326Insurance technical reserves [GFS]
3227Financial derivatives3327Financial derivatives
3228Other accounts receivable3328Other accounts payable
323Monetary gold and SDRs

9.18 Transactions in financial assets are eliminated when the two parties to the transaction are units that are being consolidated. For example, if a local government unit purchases a security issued by the central government, both the acquisition of the financial asset and the incurrence of the liability would disappear in a presentation of statistics for the entire general government sector but not in a presentation of either the central or the local government subsector separately.

E. Arrears

9.19 Some types of financial assets and liabilities, most notably securities other than shares, loans, financial derivatives, and other accounts receivable/payable, mature at a scheduled date or series of dates when the debtor is obligated to make specified payments to the creditor. If the payments are not made as scheduled, then the payments are said to be in arrears. Depending on the conditions of the contract, the terms and even the classification of the financial instrument may change. In all cases, the debtor has effectively obtained additional financing by not making the scheduled payments. To provide information on this type of implicit financing, when a scheduled payment is not made, it should be treated as if it had been made and then replaced by a new, usually short-term liability and each category of the classification of financial instruments should be subclassified to show the transactions leading to new arrears. As noted in Chapter 7, the total amount in arrears should be recorded as a memorandum item to the balance sheet.

F. Classification of transactions in financial assets and liabilities by type of financial instrument and residence

9.20Table 9.1 presents a classification of transactions in financial assets and liabilities based on the type of financial instrument involved in the transaction and the residence of the unit that incurred the liability being held by a general government unit as a financial asset or holds as a financial asset the liability incurred by the general government unit. The units classified by residence are not necessarily the units that were a party to the transaction being recorded. For example, a general government unit might purchase a financial asset in a secondary market from a nonresident, but the asset was originally issued by a resident. Under such circumstances, this instrument would be shown as a domestic instrument even though it was purchased from a nonresident.

9.21 The classifications are consistent with the classifications of the same financial assets and liabilities employed in Chapter 7 (Table 7.3). Chapter 7 also provides full definitions of the financial assets or liabilities included in each category, and those definitions are not repeated here. The immediately preceding sections of this chapter provide guidance applicable to transactions affecting all or most categories. The remainder of this section provides guidance only on those transactions for which the general guidance may not be sufficient.

9.22 Liabilities in several categories are considered debt, as defined in Chapter 7 (see paragraphs 7.142 and 7.143). In addition to normal interest and principal transactions regarding debt liabilities, government units may undertake a range of complex debt-related transactions, such as assuming debt of other units, making payments on behalf of other units, rescheduling debt, debt forgiveness, debt defeasance, and financial leasing. The special features of these types of transactions are described in Appendix 2.

9.23 The classifications described in this chapter do not include functional categories such as direct investment, portfolio investment, or international reserves.2 In Chapter 7, however, a memorandum item provides for the stocks of reserve assets and reserve-related liabilities of the general government sector.3

1. Monetary gold and SDRs (323)4

9.24 Transactions in monetary gold are the exclusive responsibility of the monetary authority, which will normally be the central bank, a public corporation. It is possible, however, for a unit of the general government sector to undertake some functions of the monetary authority, in which case it may have transactions in monetary gold or SDRs. Transactions in monetary gold and SDRs cannot be classified by the residence of the issuing unit because they are not the liabilities of any unit. When transactions in financial assets are classified by residency, transactions in monetary gold and SDRs are placed in a separate category.

9.25 Transactions in monetary gold can only take place between two monetary authorities or between a monetary authority and an international financial institution. If the monetary authority adds to its holdings of monetary gold by acquiring either newly mined gold or existing gold offered on the private market, then the gold so acquired is said to have been monetized. No transaction in financial assets is recorded. Instead, the acquisition is recorded first as a transaction in nonfinancial assets, and then an other economic flow is recorded to reclassify the gold as monetary gold. Demonetization of gold is recorded symmetrically (see Chapter 10).

9.26 SDRs are held only by the monetary authorities of IMF member countries and a limited number of authorized international financial institutions. Transactions in SDRs take place when an official holder exercises its right to obtain foreign exchange or other reserve assets from other IMF members and when SDRs are sold, loaned, or used to settle financial obligations.

2. Currency and deposits (3212, 3222, 3312, 3322)

9.27 Because the market price of domestic currency and deposits is fixed in nominal terms, the net acquisition of domestic currency and deposits is equal to the stock held at the end of the accounting period less the stock held at the beginning of the period, adjusted for any currency that was lost, stolen, or destroyed. Calculation of the net acquisition of foreign currencies and deposits must take changes in exchange rates into consideration.

9.28 Currency is treated as a liability of the unit that issued the currency. Consequently, when a unit puts new currency into circulation, a transaction is recorded that increases its liability for currency. Usually the counterpart to the increase in liabilities is an increase in the unit’s financial assets, most likely deposits.5 Transactions in gold and commemorative coins that do not circulate as legal tender are treated as transactions in nonfinancial assets rather than currency. The cost of producing new currency is an expense transaction unrelated to transactions in currency.

3. Securities other than shares (3213, 3223, 3313, 3323)

9.29 Most transactions in bonds and other types of securities other than shares are covered by the general guidelines previously established. Discounted bonds may require special attention because the difference between the discounted issue price of such a bond and its price at maturity is treated as interest accruing over the life of the bond. For the holder of the bond, a transaction must be constructed in each accounting period that records the receipt of interest revenue and its reinvestment to purchase an additional quantity of the bond. The issuer of the bond records the accrual of interest expense and an increase in its liability for bonds. For securities other than shares issued at a premium, the difference between the issue price and the price at maturity is treated as negative interest.

9.30 Index-linked securities are instruments for which either the interest or the principal is linked to a price index, the price of a commodity, or an exchange rate index. When the value of the principal is indexed, then, as with discounted bonds, each increase in principal is a transaction reflecting the payment of interest by the issuer of the security and a purchase of an additional quantity of the security by the holder.6

4. Loans (3214, 3224, 3314, 3324)

9.31 The terms of a loan contract frequently require periodic payments that will pay all interest expense accrued since the previous periodic payment and repay a portion of the original amount borrowed. Between payments, interest accrues and is added to the principal continuously. In practice, the periodic payments are usually partitioned into two transactions, one equal to the amount of interest incurred since the previous payment and the second a repayment of the original principal.

9.32 When goods are acquired under a financial lease, a change of ownership from the lessor to the lessee is deemed to take place, even though legally the leased good remains the property of the lessor. This de facto change in ownership is financed by the implicit creation of a loan.

9.33 If a loan that is a liability of a public corporation is assumed by the government unit that owns or controls it, there may be no documentary evidence to indicate whether the debt assumption was intended as a purchase of equity or a capital transfer. In the absence of evidence to the contrary, a loan assumption is treated as an acquisition of equity. If it is treated as a capital transfer, then the government unit holding the shares and other equity will record a holding gain of the same amount. Appendix 2 discusses government debt operations in more detail.

9.34 As described in Chapter 7, repurchase agreements and gold swaps are treated as loans with no change of ownership for the underlying assets that legally were sold. Similarly, consummation of the repurchase agreement or swap according to the initial terms of the agreement is treated as a liquidation of a loan.

5. Shares and other equity (3215, 3225, 3315, 3325)

9.35 The treatment of transactions in publicly traded shares is straightforward. Problems may be created, however, by the operations of quasi-corporations and public corporations.

9.36 Additions to the funds and other resources of a quasi-corporation, including in-kind transfers of non-financial assets, are treated as purchases of shares and other equities by the owner of the quasi-corporation. Similarly, receipt by the owner of proceeds from sales of any of the quasi-corporation’s assets, transfers in kind from the quasi-corporation, and withdrawals by the owner of accumulated retained earnings of the quasi-corporation are treated as sales of shares and other equity by the owner. Regular transfers to quasi-corporations to cover persistent operating deficits are subsidies, and regular withdrawals from the income of quasi-corporations are property income.

9.37 Government units may acquire equity in a public corporation or quasi-corporation as a result of legislation or an administrative change creating the corporation or quasi-corporation. In some cases, this event will amount to a reclassification of existing assets and liabilities, which is recorded as an other economic flow that results in an addition of shares and other equity. An advance of funds to create the new enterprise would be a transaction reflecting the purchase of equity.

9.38 Privatization generally is the disposal to private owners by a government unit of the controlling equity of a public corporation or quasi-corporation. Such a disposal is treated as a transaction in shares and other equity. If a public corporation or quasi-corporation sells some of its assets and transfers part or all of the proceeds to its parent government unit, then the transaction would also be a sale of shares and other equity by the government unit. Brokers’ commissions and other privatization costs are expense transactions just as all other costs of ownership transfer related to the acquisition or disposal of a financial asset.

9.39 Government units also can be privatized. If the assets disposed of as a single transaction constitute a complete institutional unit, the transaction should be classified as a sale of equity. The government is assumed to have converted the unit to a quasi-corporation immediately prior to disposal by means of a reclassification of assets, which is an other economic flow. If the assets disposed of do not constitute a complete institutional unit, then the transactions should be classified as a disposal of the individual nonfinancial and/or financial assets.

6. Insurance technical reserves (3216, 3226, 3316, 3326) [GFS]7

9.40 General government units may incur liabilities for insurance technical reserves as operators of non-life insurance schemes and both nonautonomous pension funds and unfunded retirement schemes, and they may acquire insurance technical reserves as financial assets in their capacity as holders of non-life insurance policies. Public corporations can engage in all types of insurance activities.8

9.41 If a general government unit operates a retirement scheme, then it will have transactions in liabilities for insurance technical reserves. Social contributions receivable from employees, employers, or other institutional units on behalf of individuals or households with claims on the general government unit for future retirement benefits will increase the unit’s liability for insurance technical reserves. The existing liability, which is equal to the present value of future payments, will increase over time because the future payments are discounted over fewer periods. This increase in the liability is recorded as a transaction in insurance technical reserves. Payments to retired persons or their dependents and survivors in the form of periodic payments or lump sums reduce the liability.

9.42 In general, non-life insurance premiums are paid in advance of the period covered by the policy. All such payments are transactions that increase the insurance unit’s liability and the policyholder’s asset for insurance technical reserves. As the period covered by the premium progresses, the insurance unit continuously earns the premium, which requires a transaction to decrease its liability and the policyholder’s asset for insurance technical reserves.

9.43 When valid claims are accepted by non-life insurance enterprises, they are attributed to the time at which the eventuality or accident that gave rise to the claim occurred. At that time, a transaction is recorded that increases reserves against outstanding claims as a liability of the insurance unit and an asset of the beneficiaries. If payment of the claim will be delayed for a substantial time or will consist of periodic payments over several accounting periods, then the value of the transaction should be the present value of the expected payments.

7. Financial derivatives (3217, 3227, 3317, 3327)

9.44 There are two broad classes of financial derivatives: forward-type contracts and option contracts. At the inception of a forward-type contract, it has zero value and no transaction is recorded. Forward-type contracts are typically settled by the payment of cash or the provision of some other financial instrument rather than by actual delivery of the underlying item. Any such settlement payment is recorded as a transaction in financial derivatives. If the contract is settled by delivery of the underlying item, then a transaction in the underlying item is recorded at its market price at the time of settlement, and any difference between the contract price and the market price is a transaction in financial derivatives. Forward-type contracts can also be traded before settlement, in which case a transaction in financial derivatives is recorded.

9.45 The buyer of an option pays a premium to the seller for the letter’s commitment to sell or purchase the specified amount of the underlying item on demand of the buyer. The payment of the premium is a transaction in financial derivatives in which the buyer acquires an asset and the seller incurs a liability.

9.46 Depending on the type of contract, premiums on options may be paid when the contract begins, when the option is exercised, or when the option expires. The value of the transaction at the inception of the option is the full price of the premium. If the premium is paid after the purchase of the option, then the acquisition of the option is deemed to be financed by a loan.

9.47 Many option contracts are settled by a cash payment rather than by delivery of the underlying assets or commodities to which the contract relates. Any such cash payment is recorded as a transaction in financial derivatives. If an option is exercised and the underlying item is delivered, then the acquisition or sale of the underlying asset is recorded at its market price at the time of settlement, and any difference between this amount and the contract price is recorded as a transaction in financial derivatives. If an option expires without being exercised, then no transaction is recorded to mark the expiration. Instead, an other economic flow is recorded to remove the asset and liability from the balance sheets of the parties involved.

9.48 Repayable margins paid in cash are transactions in deposits rather than transactions in financial derivatives. Repayable margins paid in collateral are not transactions. The payment of a nonrepayable margin is normally recorded as a reduction in financial derivative assets and liabilities for the two parties involved in the contract.

9.49 Any commission paid to brokers or other intermediaries for arranging a financial derivatives contract is treated as a payment for a service. In many cases, however, financial derivatives transactions involve implicit service charges, and it is usually not possible to estimate the service element. In such cases, the entire value of the transaction should be treated as a transaction in financial derivatives.

8. Other accounts receivable/payable (3218, 3228, 3318, 3328)

9.50 Transactions in trade credits and advances occur when credit is extended directly to purchasers of goods and services. Other transactions occur when advances are paid for work in progress, such as progress payments made during construction, or for prepayments of goods and services.

9.51 Miscellaneous other accounts receivable/payable occur in respect of accrued but unpaid taxes, dividends, purchases and sales of securities, rent, wages and salaries, social contributions, and similar transactions. Accrued but unpaid interest should be treated as an additional quantity of the underlying asset, but it is recognized that interest accruing on deposits and loans may have to follow national practices and be classified as accounts receivable/payable.

G. Classification of transactions in financial assets and liabilities by sector and residence

9.52 For a full understanding of financial flows and the role they play in government finance, it is often important to know not just what types of liabilities a general government unit uses to finance its activities, but also which sectors are providing the financing. In addition, it is often necessary to analyze financial flows between subsectors of the general government sector. Table 9.2 presents a classification of transactions in financial assets and liabilities based on the sector of the unit that incurred the liability being held by a general government unit as a financial asset or that holds as a financial asset the liability incurred by the general government unit.

Table 9.2:Net Acquisition of Financial Assets and Net Incurrence of Liabilities Classified by Sector of the Counterparty to the Financial Instrument and Residence
82Financial assets83Liabilities
821Domestic831Domestic
8211General government8311General government
8212Central bank8312Central bank
8213Other depository corporations8313Other depository corporations
8214Financial corporations not elsewhere classified8314Financial corporations not elsewhere classified
8215Nonfinancial corporations8315Nonfinancial corporations
8216Households and nonprofit institutions serving households8316Households and nonprofit institutions serving households
822Foreign832Foreign
8221General government8321General government
8227International organizations8327International organizations
8228Financial corporations other than international organizations8328Financial corporations other than international organizations
8229Other nonresidents8329Other nonresidents
823Monetary gold and SDRs

9.53 The composition of the sectors listed in Table 9.2 is described in Chapter 2. In the 1993 SNA, the term “sector” refers to a group of resident units. All nonresident units are referred to collectively as the rest of the world and treated as a pseudo-sector. In the GFS system, it is important to know not only the total amount of financing received from nonresident units, but also the types of nonresident units supplying the financing. In the GFS system, therefore, the classification of “sectors” is applied to nonresident units in the same manner as resident units. In particular, all international organizations are treated as a sector in Table 9.2.

For ease of expression, assets will often be used as a reference to both assets and liabilities.

For information on these categories, see paragraph 176ff of International Monetary Fund, Balance of Payments Manual, 5th ed. (Washington, 1993).

If analytically important, other classifications could be introduced. For example, transactions in financial assets and liabilities could be classified by their remaining maturities.

The numbers in parentheses after each classification category are the GFS classification codes Appendix 4 provides all classification codes used in the GFS system.

In the 1986 GFS Manual, seigniorage profits from issuing currency were treated as revenue.

It is possible for loans and other financial instruments to be index linked and the same transactions would be recorded.

[GFS] indicates mat this item has the same name but different cover-aye in the 1993 SNA.

It is assumed that general government units do not operate life insurance schemes and do not purchase life insurance policies. The treatment of insurance technical reserves created by life insurance activities of public corporations is similar to autonomous pension funds, but they are not addressed separately here. Annex IV of the 1993 SNA describes the treatment of all types of insurance schemes.

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