Chapter

7. The Balance Sheet

Author(s):
Sage De Clerck, and Tobias Wickens
Published Date:
March 2015
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This chapter and the following three chapters are concerned with the stock position and flows of assets and liabilities. This chapter defines assets, liabilities, and net worth, and describes their classification and the various balance sheet memorandum items.

Introduction

7.1 A balance sheet is a statement of the values of the stock positions of assets owned and of the liabilities owed by an institutional unit or group of units, drawn up in respect of a particular point in time.1 A balance sheet is typically compiled at the end of each reporting period, which is also the beginning of the next reporting period. In a macroeconomic statistics balance sheet, a distinction is made between nonfinancial assets, financial assets, liabilities, and net worth. The net worth of an institutional unit (or grouping of units) is the total value of its assets minus the total value of its liabilities. As for all other balance sheet items, net worth can also be viewed as a stock position resulting from the transactions and other economic flows of all previous periods. A highly abbreviated version of a balance sheet is shown in Table 7.1.2

Table 7.1Balance Sheet
AssetsOpening

balance
Closing

balance
Liabilities and net worthOpening

balance
Closing

balance
Nonfinancial assets1Liabilities1
Financial assets1Net worth
Total assets1Total liabilities and net worth
Memorandum items

Classified by categories of assets and liabilities as needed.

Classified by categories of assets and liabilities as needed.

7.2 The existence of a set of balance sheets integrated with the flows enables analysts to take a comprehensive view when monitoring and assessing economic and financial conditions and the behavior of public sector units. Balance sheet information on financial assets held by, and liabilities owed to, other entities supports the analysis of the financial risks and vulnerabilities of the general government or public sector. Similarly, with regard to claims and liabilities on nonresidents, balance sheets support the assessment of the general government’s share in the external debtor and creditor position of a country. For public corporations, balance sheets permit the computation of widely used financial ratios, while data on the stock position of fixed assets are useful in studies of their investment behavior and needs for financing.

7.3 This chapter first defines assets and liabilities in general and the two major types of assets, financial and nonfinancial assets. The following section describes the principles used to value assets and liabilities. The chapter then describes the detailed classification of assets and liabilities and the types of assets and liabilities included in each category of the classification. The final sections describe net worth, recommended memorandum items, and a supplemental cross-classification of financial assets or liabilities by sector of the counterparty.

Defining Assets and Liabilities

7.4 This section describes economic and legal ownership of an asset, as well as the asset boundary used in GFS and other macroeconomic statistics. These concepts are then used to define liabilities, financial assets, and nonfinancial assets.

Ownership and the Asset Boundary

7.5 Two types of ownership can be distinguished in macroeconomic statistics: legal ownership and economic ownership (see paragraphs 3.38–3.41). Legal and economic ownership are usually the same but differ in a few cases (e.g., financial leases discussed in paragraph 7.158).

  • The legal owner of resources, such as goods and services, natural resources, financial assets, and liabilities, is the institutional unit entitled by law and sustainable under the law to claim the benefits associated with the resources. Only if such resources have a legal owner, either on an individual or collective basis, are they recognized in macroeconomic statistics.

  • The economic owner of resources, such as goods and services, natural resources, financial assets, and liabilities, is the institutional unit entitled to claim the benefits associated with the use of these resources by virtue of accepting the associated risks.

7.6 As defined in paragraph 3.42, an asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the resource over a period of time. It is a means of carrying forward value from one reporting period to another. Only economic assets are recorded in the macroeconomic statistical systems (i.e., included within the asset boundary), and they appear in the balance sheet of the unit that is the economic owner of the asset. Economic assets are those resources (i) over which economic ownership rights are enforced by institutional units, individually or collectively, and (ii) from which economic benefits may be derived by their owners by holding them or using them over a period of time (see paragraph 4.43).

7.7 Every economic asset provides benefits by functioning as a store of value. In addition:

  • Some benefits are derived by using assets, such as buildings or machinery, in the production of goods and services.

  • Some benefits consist of property income, such as interest, dividends, and rent receivable by the owners of financial assets, land, and other nonproduced assets.

7.8 When ownership rights are established and enforced, the resource is an economic asset regardless of who receives the benefits. For example, a government may own land in a national park with the intention that its benefits accrue directly to the community at large.

7.9 To be an economic asset, a resource must also be able to supply economic benefits given the technology, scientific knowledge, economic infrastructure, available resources, and relative prices existing at a given time or expected in the foreseeable future. Thus, a known deposit of minerals is an economic asset only if it is already commercially exploitable or is expected to become commercially exploitable in the foreseeable future.

7.10 Some resources are not economic assets if ownership rights over them have not been established or are not enforced. For example, it may not be feasible to establish ownership rights over the atmosphere and certain other naturally occurring assets. In other cases, ownership rights may be established, but it may not be feasible to enforce them, such as government owned land that is so remote or inaccessible that the government cannot exercise effective control over it or the government chooses not to enforce its ownership rights. In such cases, it can be a matter of judgment as to whether the degree of control exercised by the government is sufficient for the land to be classified as an economic asset. Nonetheless, even if ownership rights can be enforced, if the assets are not capable of bringing any economic benefits to their owners, they should be excluded.

7.11 Governments use assets to produce goods and services much like corporations. For example, office buildings, together with the services of government employees, office equipment, and other goods and services, are used to produce collective or individual services, such as general administrative services. In addition, however, governments often own assets whose services are consumed directly by the general public and assets that need to be preserved because of their historic or cultural importance. Thus, when the asset boundary is applied to the general government sector, it often incorporates a wider range of assets than is normally owned by a private organization. That is, government units frequently own:

  • General-purpose assets, which are assets that other units would be likely to possess and use in similar ways, such as schools, road-building equipment, fire engines, office buildings, furniture, and computers

  • Infrastructure assets, which are immovable nonfinancial assets that generally do not have alternative uses and whose benefits accrue to the community at large; examples are streets, highways, lighting systems, bridges, communication networks, canals, and dikes

  • Heritage assets, which are assets that a government intends to preserve indefinitely because they have unique historic, cultural, educational, artistic, or architectural significance.

7.12 In some cases, governments can create economic assets by exercising their sovereign powers or other powers delegated to them. For example, a government may have the authority to assert ownership rights over naturally occurring assets that otherwise would not be subject to ownership, such as the electromagnetic spectrum and natural resources in international waters subject to designation as an exclusive economic zone.3 These assets are economic assets only if the government uses its authority to establish and enforce ownership rights.

7.13 Only actual (outstanding) liabilities (and their corresponding assets) are included in the balance sheet. Contingent assets and liabilities are not recognized as financial assets and liabilities prior to the condition(s) being fulfilled. Explicit contingent liabilities are discussed in paragraphs 7.251–7.260.

  • Amounts set aside in business accounting as provisions to provide for a unit’s future liabilities, either certain or contingent, or for a unit’s future expenditures, are not recognized in the macroeconomic statistical systems. However, amounts accrued and not yet due for payment (such as employment-related pension “provisions”) are liabilities.

  • No liability is recognized on the balance sheet for government’s implicit obligations to pay social security benefits, such as unemployment, old age pensions, and health care, in the future (see Appendix 2). However, it is recommended to include net implicit obligations for social security benefits as a memorandum item to the balance sheet (see paragraph 7.261).

  • Lines of credit, letters of credit, and loan commitments assure funds will be made available in the future, but no financial asset (and liability) in the form of a loan is created until funds are actually advanced.

  • Uncalled share capital is contingent until there is an obligation to pay the amount.

  • Environmental liabilities, which are probable and measurable estimates of future environmental cleanup, closure, and disposal costs other than those included in costs of ownership transfer (see paragraphs 8.6–8.8), are not recognized.4

Deriving Definitions for Assets and Liabilities

7.14 This section defines liabilities and financial claims, from which it then derives the definitions of financial and nonfinancial assets.

7.15 As defined in paragraph 3.45, a liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide funds or other resources to another unit (the creditor). Normally, a liability is established through a legally binding contract that specifies the terms and conditions of the payment(s) to be made, and payment according to the contract is unconditional. Whenever a liability exists, the creditor has a corresponding financial claim on the debtor. A financial claim is an asset that typically entitles the owner of the asset (the creditor) to receive funds or other resources from another unit, under the terms of a liability. Like liabilities, financial claims are unconditional. Financial claims consist of debt instruments (see paragraph 7.236), financial derivatives and employee stock options, and equity and investment fund shares.

  • Debt instruments are financial instruments that typically are created when one unit provides funds or other resources (e.g., goods in the case of trade credit) to a second unit and the second unit agrees to provide a return in the future. Debt liabilities can also be created by the force of law,5 and by events that require future transfer of payments.6 For a liability to be considered debt it must exist and be outstanding.

  • In contrast, financial derivatives are financial instruments of which the underlying contracts involve risk transfer. Thus, rather than supplying funds or other resources, a derivative contract shifts the exposure to the effect of a change in the value of an item between the parties, without a change in ownership of that item. Employee stock options share some of the risk elements of financial derivatives, but are also designed to be a form of remuneration.

  • Equity and investment fund shares issued by corporations and similar legal forms of organization are treated as liabilities of the issuing units even though the holders of the claims do not have a fixed or predetermined monetary claim on the corporation. Equity and investment fund shares do, however, entitle their owners to benefits in the form of dividends and other ownership distributions, and they often are held with the expectation of receiving holding gains. In the event the issuing unit is liquidated, shares and other equities become claims on the residual value of the unit after the claims of all creditors have been met. If a public corporation has formally issued shares or another form of equity, then the shares are a liability of that corporation and an asset of the government or other unit that owns them. If a public corporation has not issued any type of share, then the value of other equity is estimated (see paragraph 7.173).

  • Monetary gold in the form of bullion is not a financial claim, because it is not the liability of any other unit. Monetary gold does, however, provide economic benefits by serving as a store of value and a means of international payment to settle financial claims and finance other types of transactions. As a result, monetary gold in the form of bullion is, by convention, treated as a financial asset. Monetary gold in the form of unallocated gold accounts is a financial claim and, therefore, a liability of another unit in the form of currency and deposits (see paragraph 7.139).

7.16 Financial assets consist of financial claims plus gold bullion held by monetary authorities7 as a reserve asset.

7.17 Nonfinancial assets are economic assets other than financial assets. The main categories of nonfinancial assets are: produced assets (such as fixed assets, inventories, and valuables) and nonproduced assets (such as natural resources, contracts, leases, and licenses, and goodwill and marketing assets). Nonfinancial assets are stores of value and provide benefits either through their use in the production of goods and services or in the form of property income. Unlike financial claims, nonfinancial assets have no counterpart liability—that is, the owner of the nonfinancial asset does not have a claim on another institutional unit. Nonfinancial assets may come into existence as the output from a production process, or in other ways, such as natural occurrences.

7.18 Produced assets are classified as fixed assets, inventories, or valuables:

  • Fixed assets are produced assets that are used repeatedly or continuously in production processes for more than one year. Fixed assets are discussed in paragraphs 7.35–7.74.

  • Inventories are produced assets consisting of goods and services, which came into existence in the current period or in an earlier period, and that are held for sale, use in production, or other use at a later date. Inventories are discussed in paragraphs 7.75–7.86.

  • Valuables are produced assets of considerable value that are not used primarily for purposes of production or consumption, but are held primarily as stores of value over time. Valuables are discussed in paragraphs 7.87–7.89.

7.19 Naturally occurring assets and constructs of society are both referred to as nonproduced assets (see paragraph 7.90). Naturally occurring assets include land, subsoil mineral deposits, fish in open but territorial waters, and the radio spectrum when ownership rights are enforced. Constructs of society that are assets include some contracts, leases, and licenses, as well as goodwill and marketing assets.

Valuation of Assets and Liabilities

7.20 As discussed in paragraph 3.113, stock positions of assets and liabilities should be valued at market value—that is, as if they were acquired in market transactions on the balance sheet reporting date (reference date). Therefore, the value of an asset at any given time is its current market value, which is the amount that would have to be paid to acquire the asset on the reporting date, taking into account its age, condition, and other relevant factors. This amount depends on the economic benefits that the owner of the asset can derive by holding or using it. The remaining benefits expected to be received from most assets diminish with the passage of time, which will reduce the value of the asset. The remaining benefits of some assets, such as valuables, may increase with the passage of time. The value of the remaining benefits may also increase or decrease because of changes in economic conditions.

7.21 In addition to current market value, the nominal value (see paragraph 3.115) of financial instruments is also useful for some purposes. This value is typically established by reference to the terms of a contract between the debtor and creditor. The nominal value of a debt instrument reflects the value of the debt at creation plus any subsequent economic flows, such as transactions (e.g., accrual of interest or repayment of principal), exchange rate and other valuation changes other than market price changes,8 and other volume changes.

7.22 The current market value for nonfinancial assets (except land) includes all costs of ownership transfer and for financial assets excludes these costs. For more details, see paragraphs 8.6–8.8.

7.23 The value of financial assets and liabilities denominated in foreign currencies should be converted to the domestic currency as discussed in paragraph 3.119.

7.24 Ideally, observable market prices should be used to value all assets and liabilities in a balance sheet. However, in estimating the current market price for balance sheet valuation, a price averaged over all transactions in a market can be used if the market is one on which the items in question are regularly, actively, and freely traded. When there are no observable prices because the items in question have not been purchased or sold on the market in the recent past, an attempt has to be made to estimate what the prices would be were the assets to be acquired on the market on the date to which the balance sheet relates. Such estimates may be obtained by (i) accumulating and revaluing transactions, or (ii) estimating the present value of future returns. These two methods, together with values observed in markets, are discussed in paragraphs 7.26–7.33.

7.25 The following paragraphs describe possible methods of estimating current market prices. Additional guidance on the valuation of specific types of assets and liabilities is included in the relevant parts of the section that describes the classification of assets and liabilities. Because the valuation of liabilities is the same as the valuation of the corresponding financial assets, in most cases, the remainder of this chapter will refer only to financial assets, but such references should be read as including liabilities equally. GFS compilers are typically not expected to independently derive the market values of assets and liabilities; they should evaluate what is available and how that information could be used in the GFS balance sheet.

Value Observed in Markets

7.26 The ideal source of price observations for valuing balance sheet items is a market, like the stock exchange, in which each asset traded is completely homogeneous, is often traded in considerable volume, and has its market price listed at regular intervals. Such markets yield data on prices that can be multiplied by indicators of quantity in order to compute the total market value of different classes of assets held by sectors and of different classes of their liabilities.

7.27 For securities quoted on a stock exchange, for example, it is feasible to gather the prices of individual assets and of broad classes of assets and, in addition, to determine the global valuation of all the existing securities of a given type. Debt securities traded (or tradable) in organized and other financial markets—such as bills, bonds, debentures, negotiable certificates of deposits, asset-backed securities, etc.—should be valued at market value and, in the case of liabilities, at nominal value as well.9 In some countries, another example of a market in which assets may be traded in sufficient numbers to provide useful price information is the market for existing dwellings.

7.28 If assets of the same kind are being produced and sold on the market, an existing asset may be valued at the current market price of a newly produced asset adjusted for consumption of fixed capital in the case of fixed assets, and any other differences between the existing asset and a newly produced asset. This adjustment for consumption of fixed capital should be calculated on the basis of the asset prices prevailing on the balance sheet reference date rather than the actual amounts previously recorded as an expense.10

7.29 In addition to providing direct observations on the prices of assets actually traded there, information from such markets may also be used to price similar assets that are not traded. For example, information from the stock exchange also may be used to price unlisted shares by analogy with similar, listed shares, making some allowance for the inferior marketability of the unlisted shares. Similarly, independent appraisals of assets for insurance or other purposes generally are based on observed prices for items that are close substitutes, although not identical, and this approach can be used for balance sheet valuation.

7.30 Debt instruments other than debt securities (as well as the corresponding financial assets in the form of debt instruments) are normally not traded and, therefore, lack generally observable market values. This means that these values have to be estimated by using the nominal value as a proxy (see paragraph 7.122).11

  • Nontraded debt instruments: Debt instruments (as well as the corresponding financial assets in the form of debt instruments) not generally traded (or tradable) in organized or other financial markets—namely, loans, currency and deposits, and other accounts payable/receivable—should be valued at nominal value. The nominal value of a debt instrument could be less than the originally advanced amount if there have been repayments of principal, debt forgiveness, or other economic flows (such as arising from indexation) that affect the value of the amount outstanding. The nominal value of a debt instrument could be more than originally advanced because of, for example, the accrual of interest or other economic flows.

  • Debt instruments that do not accrue interest: For debt instruments (as well as the corresponding financial assets in the form of debt instruments) that do not accrue interest—for example, most trade credit and advances—the nominal value is the amount owed by the debtor to the creditor at the balance sheet date. If there is an unusually long time before payment is due on an outstanding debt liability on which no interest accrues, the value of the principal should be reduced by an amount that reflects the time to maturity and an appropriate existing contractual rate, such as for similar debt instruments (see also paragraph 3.118).

  • Repayment specified in terms of commodities or other goods: For some instruments, such as a loan, repayment may be specified in a contract in terms of commodities or other goods deliverable in installments over a period of time. At inception, the value of the debt (as well as the corresponding financial assets in the form of debt instruments) is equal to the principal advanced. When payments are made in the form of the good or commodity, the value of the principal outstanding will be reduced by the market value of the good or commodity at the time the payment is made.

  • Extinguishing a trade credit under barter arrangements: The value of the commodities, other goods, or services to be provided for extinguishing a trade credit liability (and the corresponding financial asset) under barter arrangements is established at the creation of the debt—that is, when the exchange of value occurred. However, as noted earlier, if there is an unusually long time before payment, the value of the principal should be reduced by an amount that reflects the time to maturity and an appropriate existing contractual rate, and interest should accrue until actual payment is made.

  • Nontraded debt instruments with uncertain nominal values: For nontraded debt instruments (as well as the corresponding financial assets in the form of debt instruments) where the nominal value is uncertain, the nominal value can be calculated by discounting future interest and principal payments at an appropriate existing contractual rate of interest.

Value Obtained by Accumulating and Revaluing Transactions

7.31 In the absence of observable market prices, the balance sheet value of an asset may be obtained by accumulating and revaluing transactions. The values of most nonfinancial assets change, reflecting changes in market prices. At the same time, initial acquisition costs are reduced by consumption of fixed capital12 (in the case of fixed assets) or amortization or depletion13 (in the case of other nonfinancial assets) over the expected life of the asset. In principle, the value of such a nonfinancial asset at a given point in its life is given by the current acquisition price of an equivalent new asset minus the accumulated consumption of fixed capital, amortization, or depletion. This valuation is referred to as the written-down replacement cost. When reliable, directly observed market prices for used assets are not available, applying this method gives a reasonable approximation of what the market price would be, were the asset offered for sale. For example, the principle could be applied as follows for these assets:

  • In the absence of observed market values, most fixed assets are recorded in the balance sheet at their written-down replacement cost.

  • Intangible nonproduced assets, such as goodwill and marketing assets, are typically valued at their initial acquisition costs minus an allowance for amortization. For this method, a pattern of decline must be chosen, which may be based on tax laws and accounting conventions.

  • It may be possible to value subsoil and other naturally occurring assets at their initial acquisition costs (appropriately revalued using a relevant specific or commodity price index) minus an allowance for depletion.

7.32 The perpetual inventory method (PIM) is commonly used to estimate the written-down replacement cost of a category of assets, especially tangible fixed assets. With this method, the value of the stock is based on estimates of acquisitions and disposals that have been accumulated (after deduction of the accumulated consumption of fixed capital, amortization, or depletion) and revalued over a long enough period to cover the acquisition of all assets in the category. The PIM may be viewed as the macro equivalence of an asset register: the PIM does these calculations for large groups of assets, while an asset register does them for individual assets or asset types.14

Present Value of Future Returns

7.33 In some cases, current market prices may be approximated by the present value15 of the future economic benefits expected from a given asset. This method may be feasible for a number of financial assets, naturally occurring assets, and intangible assets. For example, timber and subsoil assets are assets whose benefits are normally receivable well in the future and/or spread over several years. Current prices can also be approximated by net present value when there are costs of bringing assets to the market. The economic benefit and costs can be discounted to estimate the net present value of the asset.

Classification of Assets and Liabilities

Nonfinancial Assets (61)16

7.34 At the first level of classification, there are four categories of nonfinancial assets. The first three categories are produced assets—fixed assets (611), inventories (612), and valuables (613)—and the fourth consists of all nonproduced assets (614). The summary classification of nonfinancial assets is shown in Table 7.2; more detailed classifications of these categories are provided in the discussions of the various types of fixed assets, where relevant.17

Table 7.2Summary Classification of Nonfinancial Assets
61Nonfinancial assets
611Fixed assets
6111Buildings and structures
61111Dwellings
61112Buildings other than dwellings
61113Other structures
61114Land improvements
6112Machinery and equipment
61121Transport equipment
61122Machinery and equipment other than transport equipment
6113Other fixed assets
61131Cultivated biological resources
61132Intellectual property products
6114Weapons systems
612Inventories
613Valuables
614Nonproduced assets
6141Land
6142Mineral and energy resources
6143Other naturally occurring assets
61431Noncultivated biological resources
61432Water resources
61433Other natural resources
6144Intangible nonproduced assets
61441Contracts, leases, and licenses
61442Goodwill and marketing assets

Fixed assets (611)

7.35 Fixed assets (611) are produced assets that are used repeatedly or continuously in production processes for more than one year. The distinguishing feature of a fixed asset is not that it is durable in some physical sense, but that it may be used repeatedly or continuously in production over a long period of time, which is taken to be more than one year (by convention). Some goods, such as coal used as fuel, may be highly durable physically but cannot be fixed assets because they can be used only once. Fixed assets are further classified as buildings and structures (6111), machinery and equipment (6112), other fixed assets (6113), and weapons systems (6114).

7.36 In general, in the absence of observable market prices for used assets, the written-down replacement cost is used as a proxy for the current market value of fixed assets. In the remainder of this section, it is noted when a particular type of fixed asset is likely to be more accurately valued by another method.

7.37 The production of some fixed assets may span two or more reporting periods. These nonfinancial assets should be reflected on the balance sheet, in principle, when economic ownership changes, as evidenced by the transfer of risks and benefits associated with the asset. For high-value fixed assets such as ships, heavy machinery, and other equipment, ownership changes are recorded at the time agreed between the parties; for example, it could be a progressive change in line with stage payments, or in full on delivery. When a contract of sale is agreed in advance for the construction of buildings and structures, incomplete structures are being acquired in each period through progress payments and classified as fixed assets on the purchaser unit’s balance sheet (i.e., the structure is being sold by the construction contractor to the purchaser in stages as the latter takes legal possession of the structure). When progress payments exceed the value of the incomplete asset, the excess should be recorded as a trade advance that will be exhausted as work proceeds. In the absence of a contract of sale, the incomplete structure is recorded as work in progress, and completed structures are recorded as finished goods, on the balance sheet of the unit doing the construction until ownership of the asset changes. Fixed assets being constructed on own account are treated as fixed assets rather than inventories of work in progress. These general principles also apply to the production of cultivated assets (see paragraph 7.62).

7.38 Fixed assets acquired under a financial lease—most likely machinery and equipment—are treated as if purchased and owned by the user or lessee (the economic owner) rather than the lessor (the legal owner). The acquisition is treated as being financed by a financial claim, classified as a loan. For example, if a bank purchases an airplane and then leases it to the national airline, the airplane is recorded as an asset of the airline and a loan is recorded as a liability of the airline and an asset of the bank. Financial leases are discussed in detail in paragraphs A4.10–A4.15.

7.39 A further consideration to be taken into account in determining ownership concerns fixed assets built under a public-private partnership (PPP) or a build, own, operate, and transfer (BOOT) scheme, sometimes also described as a private finance initiative (PFI), or some other similar shorthand. The statistical treatment is based on the economic ownership of the asset involved (see paragraph 7.5). PPPs are discussed in detail in paragraphs A4.58–A4.65. Also, immovable fixed assets, such as buildings and other structures within the economic territory, are deemed, by convention, to be owned by resident units (see paragraph 2.13).

7.40 Small/hand tools are excluded from the fixed asset boundary. Costs incurred on these inexpensive durable goods are recorded as use of goods and services (22) when such expenses are incurred regularly and are small compared with the costs incurred for the acquisition of machinery and equipment. But there can be circumstances when such small/hand tools are recorded as fixed assets (see paragraph 6.43).

Buildings and structures (6111)

7.41 Buildings and structures (6111) consist of dwellings (61111), buildings other than dwellings (61112), other structures (61113), and land improvements (61114), as shown in Table 7.3. The value of buildings and structures includes the costs of site clearance and preparation and the value of all fixtures, facilities, and equipment that are integral parts of the structures.

Table 7.3Classification of Buildings and Structures
6111Buildings and structures
61111Dwellings
61112Buildings other than dwellings
61113Other structures
61114Land improvements

7.42 Public monuments in the form of buildings and structures are included here. Public monuments are identifiable because of particular historical, national, regional, local, religious, or symbolic significance. They are accessible to the general public, and visitors are often charged for admission to the monuments or their vicinity. Public sector units typically use public monuments to produce cultural or entertainment-type services. In principle, public monuments should be included in dwellings, buildings other than dwellings, and other structures, as appropriate; in practice, it may be desirable to classify them with other structures when such a breakdown is not available. Consumption of fixed capital on new monuments, or on major improvements to existing monuments, should be calculated on the assumption of appropriately long service lives.

7.43 Public monuments can be valued directly, however, only when their significance has been recognized by someone other than the owner, typically by a sale or a formal appraisal. Newly constructed public monuments are valued at written-down replacement cost. Other than newly constructed monuments should be valued at the most recent sale price, updated, if need be, by a general price index. If no sale price is available, then an alternative valuation, such as an insurance appraisal or replacement cost (see paragraph 7.31), should be used.

Dwellings (61111)

7.44 Dwellings (61111) are buildings, or designated parts of buildings, that are used entirely or primarily as residences, including any associated structures, such as garages, and all permanent fixtures customarily installed in residences. Houseboats, barges, mobile homes, and caravans that are used as principal residences are also included, as are public monuments identified primarily as dwellings. Dwellings acquired by government for military personnel are included in this category because they are used in the same way as dwellings acquired by civilians. Incomplete dwellings are included to the extent that the ultimate user is deemed to have taken economic ownership, because the construction is on own account, the ultimate user assumed the risks and benefits of the asset, or as evidenced by the existence of a contract of sale or purchase.

7.45 For dwellings, there may be adequate information available from the sale of both new and existing buildings in equivalent private markets to assist in making balance sheet estimates of comparable price movements in the total value of public sector dwellings. However, these house prices depend to a considerable extent on location and may include land values. The geographical pattern of sales in the period may not cover all areas adequately, in which case a technique such as a PIM will have to be used (see paragraph 7.32). This technique will probably also apply to many other public buildings and structures since their characteristics are often specific to the structure concerned.

Buildings other than dwellings (61112)

7.46 Buildings other than dwellings (61112) include whole buildings or parts of buildings not designated as dwellings. Fixtures, facilities, and equipment that are integral parts of the structures are included. For new buildings, costs of site clearance and preparation are included.

7.47 Examples of types of buildings included in this category are office buildings, schools, hospitals, buildings for public entertainment, warehouses and industrial buildings, commercial buildings, hotels, and restaurants. Public monuments identified primarily as nonresidential buildings are also included. Prisons, schools, and hospitals are regarded as buildings other than dwellings despite the fact that they may shelter institutional households. Buildings and structures acquired for military purposes are included to the extent that they are used repeatedly, or continuously, in processes of production for more than one year.

Other structures (61113)

7.48 Other structures (61113) consist of all structures other than buildings. The costs of site clearance and preparation are also included. Public monuments are included if identification as dwellings or buildings other than dwellings is not possible. Also included are the construction of sea walls, dikes, flood barriers, etc. intended to improve the quality and quantity of land adjacent to them. The infrastructure necessary for aquaculture, such as fish farms and shellfish beds, is also included. Further examples are:

  • Highways, streets, roads, bridges, elevated highways, tunnels, railways, subways, and airfield runways

  • Sewers, waterways, harbors, dams, and other waterworks

  • Shafts, tunnels, and other structures associated with mining mineral and energy resources

  • Communication lines, power lines, long-distance pipelines, local pipelines, and cables

  • Outdoor sport and recreation facilities

  • Structures acquired for military purposes are included to the extent that they are used repeatedly, or continuously, in processes of production for more than one year.

Land improvements (61114)

7.49 Land improvements (61114) are the result of actions that lead to major improvements in the quantity, quality, or productivity of land, or prevent its deterioration. Activities such as land reclamation, land clearance, land contouring, and creation of wells and watering holes that are integral to the land in question are to be treated as resulting in land improvements. Seawalls, dikes, dams, and major irrigation systems that are in the vicinity of the land but not integral to it, which often affect land belonging to several owners and which are often carried out by government, are classified as other structures (61113).

7.50 Land improvements represent a category of fixed assets distinct from the nonproduced asset land (6141) as it existed before improvement. Unimproved land remains a nonproduced asset and as such is subject to holding gains and losses separately from price changes affecting the improvements. In cases where it is not possible to separate the value of the land before improvement and the value of those improvements, the asset should be allocated to the category that represents the greater part of the value.

7.51 The value of land improvements is shown as the written-down replacement cost of the improvements as originally carried out, suitably revalued to market prices. This is conceptually equal to the difference in value between the land concerned in an unimproved or natural state and its value after the improvements have been made, taking into account price changes. The costs of ownership transfer on all land are, by convention, included with land improvements. Consumption of fixed capital and the costs of ownership transfer are discussed in paragraphs 6.53–6.60.

Machinery and equipment (6112)

7.52 Machinery and equipment (6112) cover transport equipment, machinery for information, computer, and telecommunications (ICT) equipment, and machinery and equipment not elsewhere classified. Machinery and equipment forming an integral part of a building or other structure are included in the value of the building or structure rather than in machinery and equipment. Tools that are inexpensive and purchased at a relatively steady rate, such as hand tools, are not considered fixed assets unless they form a large share of the stock of machinery and equipment. As explained in paragraph 7.38, machinery and equipment under a financial lease are classified here because they are treated as being acquired by the user (lessee). Machinery and equipment acquired for military purposes other than weapons systems are classified under this category; weapons systems (6114) form a separate category (see paragraph 7.74).

7.53 Machinery and equipment are classified in two main categories: transport equipment (61121) and machinery and equipment other than transport equipment (61122), with a further breakdown of other machinery and equipment, as shown in Table 7.4.

Table 7.4Classification of Machinery and Equipment
6112Machinery and equipment
61121Transport equipment
61122Machinery and equipment other than transport equipment
611221Information, computer, and telecommunications (ICT) equipment
611222Machinery and equipment not elsewhere classified

Transport equipment (61121)

7.54 Transport equipment (61121) consists of equipment for moving people and objects, including motor vehicles, trailers and semitrailers, ships, railway locomotives and rolling stock, aircraft, motorcycles, and bicycles. Markets for existing automobiles, aircraft, and some other types of transportation equipment may be sufficiently representative to yield price observations that are superior to valuations at written-down replacement cost.

Machinery and equipment other than transport equipment (61122)

7.55 This category consists of all machinery and equipment other than transport equipment. A distinction is made between information, computer, and telecommunications (ICT) equipment (611221) and machinery and equipment not elsewhere classified (611222).

Information, computer, and telecommunications equipment (ICT) (611221)

7.56 Information, computer, and telecommunications equipment (611221) consists of devices using electronic controls and also the electronic components forming part of these devices. Examples are products that form part of computing machinery and parts and accessories thereof, television and radio transmitters, television, video, and digital cameras, and telephone sets. In practice, this narrows the coverage of ICT equipment mostly to computer hardware and telecommunications equipment.

Machinery and equipment not elsewhere classified (611222)

7.57 This category includes all machinery and equipment not classified in any of the other machinery and equipment categories.18 Types of assets that would be included are general- and special-purpose machinery; office and accounting equipment; electrical machinery; medical appliances; precision and optical instruments; furniture; watches and clocks; musical instruments; and sports goods. It also includes paintings, sculptures, other works of art or antiques, and other collections of considerable value that are owned and displayed for the purpose of producing museum and similar services. Similar items owned primarily as stores of value that are not intended for use in production would be classified as valuables (see paragraphs 7.87–7.89). Also excluded from this category are inexpensive durable goods such as small/hand tools that are recorded as use of goods and services (22) (see paragraph 6.43).

Other fixed assets (6113)

7.58 Other fixed assets consist of cultivated biological resources (61131) and intellectual property products (61132), as shown in Table 7.5.

Table 7.5Classification of Other Fixed Assets
6113Other fixed assets
61131Cultivated biological resources
611311Animal resources yielding repeat products
611312Tree, crop, and plant resources yielding repeat products
61132Intellectual property products
611321Research and development
611322Mineral exploration and evaluation
611323Computer software and databases
6113231Computer software
6113232Databases
611324Entertainment, literary, and artistic originals
611325Other intellectual property products

Cultivated biological resources (61131)

7.59 Cultivated biological resources (61131) cover animal resources yielding repeat products and tree, crop, and plant resources yielding repeat products whose natural growth and regeneration are under the direct control, responsibility, and management of institutional units.

7.60Animal resources yielding repeat products (611311) include breeding stocks, dairy cattle, draft animals, sheep, or other animals used for wool production, animals used for transportation, racing, or entertainment, and aquatic resources yielding repeat products. Immature cultivated assets are excluded unless produced for own use. Animals raised for slaughter, including poultry, are not fixed assets but inventories.

7.61Tree, crop, and plant resources yielding repeat products (611312) include trees (including vines and shrubs) cultivated for fruits and nuts, for sap and resin, and for bark and leaf products. Trees grown for timber that yield a finished product once only when they are ultimately felled are not fixed assets, but are included as inventories, just as grains or vegetables that produce only a single crop when they are harvested cannot be fixed assets.

7.62 In general, when the production of fixed assets takes a long time to complete, those assets for which production is not yet completed at the end of the reporting period are recorded as inventories in the form of work in progress. These general principles also apply to the production of cultivated assets, such as animals or trees that may take a long time to reach maturity. Two cases need to be distinguished from each other: the production of cultivated products by specialized producers, such as breeders or tree nurseries, and the own-account production of cultivated assets by their users:

  • In the case of the specialist producers, animals or trees whose production is not yet complete and are not ready for sale or delivery are recorded as work in progress.

  • However, when animals or trees intended to be used as fixed assets are produced on own account on farms or elsewhere, incomplete assets in the form of immature animals, trees, etc. not ready to be used in production are treated as the acquisition of fixed assets by the producing public sector unit in its capacity as eventual user and not as work in progress.

7.63 Only animals and plants cultivated under the direct control, responsibility, and management of institutional units are cultivated assets or inventories. Otherwise, they are nonproduced assets. Animals classified as cultivated biological resources usually can be valued on the basis of the current market prices for similar animals of a given age. Such information is less likely to be available for plants; more likely they will have to be valued at the written-down replacement cost.

Intellectual property products (61132)

7.64 Intellectual property products (61132) are the result of research, development, investigation, or innovation leading to knowledge that the developers can market or use to their own benefit in production because use of the knowledge is restricted by means of legal or other protection. The knowledge may be embodied in a free-standing product or may be embodied in another product. When the latter is the case, the product embodying the knowledge has an increased price relative to a similar product without this embodied knowledge. The knowledge remains an asset as long as its use can create some form of monopoly profits for its owner. When it is no longer protected or becomes outdated by later developments, it ceases to be an asset. Intellectual property products can be classified as:

  • Research and development (611321)

  • Mineral exploration and evaluation (611322)

  • Computer software and databases (611323)

  • Entertainment, literary, and artistic originals (611324)

  • Other intellectual property products (611325).

7.65 Some intellectual property products are used solely by the unit responsible for their development or by a single unit to whom the product is transferred. Mineral exploration and evaluation are an example. Other products, such as computer software and artistic originals, are used in two forms. The first is the original copy. This is frequently controlled by a single unit but exceptions exist, as explained in the remainder of this section. The original is used to make copies that are, in turn, supplied to other institutional units. The copies may be sold outright or made available under a license:

  • A copy sold outright may be treated as a fixed asset if it satisfies the necessary conditions—that is, it will be used in production for a period in excess of one year.

  • A copy made available under a license to use may also be treated as a fixed asset if it meets the necessary conditions—that is, if it is expected to be used in production for more than one year and the licensee assumes all the risks and rewards of ownership. A good indication, but not a necessary one, is if the license is purchased with a single payment for use over a multiyear period.

  • If the acquisition of a copy with a license to use is purchased with regular payments over a multiyear contract and the licensee is judged to have acquired economic ownership of the copy, then it should be regarded as the acquisition of a fixed asset.

  • If regular payments are made for a license to use without a long-term contract, then the payments are treated as payments for a service.

  • If there is a large initial payment followed by a series of smaller payments in succeeding years, the initial payment is recorded as the net acquisition of a fixed asset and the succeeding payments are treated as payments for a service.

  • If the license allows the licensee to reproduce the original and subsequently assume responsibility for the distribution, support, and maintenance of these copies, then this is described as a license to reproduce and should be regarded as the sale of part or whole of the original to the unit holding the license to reproduce.

7.66 Research and development (611321) consists of the value of expenditure on creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture, and society, and use of this stock of knowledge to devise new applications. It does not extend to including human capital as assets within GFS and other macroeconomic statistics. The value of research and development should be determined in terms of the economic benefits it is expected to provide in the future. This value includes the provision of public services in the case of research and development acquired by government. In principle, research and development that does not provide an economic benefit to its owner does not constitute a fixed asset and should be treated as an expense. Only research and development that meets the criteria to be a nonfinancial asset should be included in this category.19

7.67 Unless the market value of the research and development is observed directly, it may, by convention, be valued at the sum of costs, including the cost of unsuccessful research and development. More specifically, research and development undertaken by government units, universities, nonprofit research institutes, etc. is nonmarket production and should be valued on the basis of the total costs incurred, excluding a return to capital used. Research and development expenditure carried out on contract is valued at the contract price. If carried out on own account, it is valued as cumulated costs. If it is carried out by a public corporation, the costs include a return to capital. These valuations need to be increased for changes in prices and reduced because of consumption of fixed capital over the life of the asset. With the inclusion of research and development in the asset boundary, patented resources are no longer considered as a form of nonproduced assets.20

7.68 Mineral exploration and evaluation (611322) consist of the value of expenditure on exploration for petroleum and natural gas and for nonpetroleum deposits and subsequent evaluation of the discoveries made. The information obtained from exploration influences the production activities of those who obtain it over a number of years. Mineral exploration and evaluation should be valued either on the basis of the amounts payable under contracts awarded to other institutional units for the purpose or on the basis of the costs incurred for exploration undertaken on own account. These costs should include a return to the fixed capital used in the exploration activity. In addition to the costs of actual test drilling and boring, mineral exploration includes any prelicense, license, acquisition, and appraisal costs, the costs of aerial and other surveys, and transportation and other costs incurred to make the exploration possible. The value of the resulting asset is not measured by the value of new deposits discovered by the exploration but by the value of the resources allocated to exploration during the reporting period. Exploration undertaken in the past whose value has not yet been fully written off should be revalued to the prices and costs of the current period.

7.69 Computer software and databases (611323) are grouped together because a computerized database cannot be developed independently of a database management system that is itself computer software. This category can be further divided into computer software (6113231) and databases (6113232).

7.70 Computer software (6113231) includes computer programs, program descriptions, and supporting materials for both systems and applications software that is expected to be used for more than one year. The software may be purchased from other units or developed on own account and may be intended only for own use or may be intended for sale by means of copies. Databases (6113232) consist of files of data organized in such a way as to permit resource-effective access and use of the data. These expenditures on the purchase, development, or extension of computer databases are assets when expected to be used in production for more than one year.

7.71 The value of computer software and databases (611323) should be based on the amount payable if acquired from another unit or on the costs of production (including a return to capital if produced by a public corporation) if produced on own account. Software and databases acquired in previous years and not yet fully written off should be revalued to current prices.

7.72 Entertainment, literary, and artistic originals (611324) are original films, sound recordings, manuscripts, tapes, and models in which drama performances, radio and television programming, musical performances, sporting events, and literary and artistic output are recorded or embodied. They should be valued at their current market price when they are actually traded. Otherwise, they should be valued either on the basis of their acquisition price or costs of production (including a return to capital if produced by a public corporation), revalued to the prices of the current period and written down, or on the basis of the present value of the expected future receipts.

7.73 Other intellectual property products (611325) consist of new information and specialized knowledge not elsewhere classified, the use of which is restricted to the units that have established ownership rights over the information or to other units licensed by the owners. The assets should be valued at their current written-down replacement cost or the present value of expected future receipts.

Weapons systems (6114)

7.74 Weapons systems (6114) include vehicles and other equipment, such as warships, submarines, military aircraft, tanks, missile carriers and launchers, etc. Weapons systems are treated as fixed assets. The military weapons systems comprising specialized vehicles and other equipment, such as warships, submarines, military aircraft, tanks, missile carriers and launchers, etc., are used continuously in the provision of defense services, even if their peacetime use is simply to provide deterrence. Therefore, military weapons systems should be classified as fixed assets and this classification of military weapons systems as fixed assets should be based on the same criteria as for other fixed assets—that is, produced assets that are themselves used repeatedly, or continuously, in processes of production for more than one year. Most single-use weapons they deliver, such as ammunition, missiles, rockets, bombs, etc., are treated as military inventories (61225) (see paragraphs 7.86 and 6.49). However, some single-use items, such as certain types of ballistic missiles with a highly destructive capability, may provide an ongoing service of deterrence against aggressors and therefore meet the general criteria for classification as fixed assets. Weapons systems are valued at their written-down replacement cost.

Inventories (612)

7.75 Inventories (612) are produced assets consisting of goods and services, which came into existence in the current period or in an earlier period, and that are held for sale, use in production, or other use at a later date. Inventories are classified as materials and supplies (61221), work in progress (61222), finished goods (61223), goods for resale (61224), and military inventories (61225), as shown in Table 7.6. Each of these types of inventories has a different economic function.

Table 7.6Classification of Inventories
612Inventories
61221Materials and supplies
61222Work in progress
61223Finished goods
61224Goods for resale
61225Military inventories

7.76 Inventories consist of stocks of:

  • Goods that are still held by the units that produced them prior to their being further processed, sold, delivered to other units, or used in other ways

  • Products acquired from other units that are intended to be used in the production of market and nonmarket goods and services by units, or for resale without further processing

  • Strategic stocks that are goods held for strategic and emergency purposes, goods held by market regulatory organizations, and other goods of special importance to the nation, such as grain, military inventories, and petroleum.

7.77 Inventories may include services consisting of work in progress or finished products—for example, architectural drawings that are in the process of completion or are completed and waiting for the building to which they relate to be started.

7.78 Inventories should be valued at their current market prices on the balance sheet date rather than their acquisition prices. In principle, current market prices should be available for most types of inventories, but in practice, the values of inventories frequently are estimated by adjusting book or acquisition values of inventories with the aid of price indexes.

Materials and supplies (61221)

7.79 Materials and supplies (61221) consist of all goods held with the intention of using them as inputs to a production process. Public sector units may hold a variety of goods as materials and supplies, including office supplies, fuel, and foodstuffs. Every public sector unit may be expected to hold some materials and supplies, if only office supplies. Materials and supplies often can be valued on the basis of the current market prices for the same goods.

Work in progress (61222)

7.80 Work in progress (61222) consists of goods and services that are not yet sufficiently processed to be in a state in which it is normally supplied to other institutional units. General government units that primarily produce nonmarket services are likely to have little or no work in progress, as the production of most such services is completed in a short time span or continuously. Work in progress must be recorded for any output that is not complete at the end of the reporting period, such as construction. The only exceptions to recording incomplete work as work in progress are for partially completed projects for which the ultimate owner is deemed to have taken economic ownership in stages (see paragraph 7.37). Economic ownership conveys in stages when the production is for own use, the new owner assumes the risks and benefits associated with the incomplete asset, or when evidenced by specific clauses in a contract of sale or purchase. In these exceptions, the partially complete products are recorded as the acquisition of fixed assets rather than work in progress.

7.81 Work in progress can take a wide variety of different forms, ranging from growing crops to developing computer programs. Although work in progress is output that has not reached the state in which it is normally supplied to others, its ownership is nevertheless transferable, if necessary.21

7.82 Work in progress inventories are valued on the basis of the cost of production at current prices as of the balance sheet date. The value of standing timber and other cultivated crops may be estimated by discounting the future proceeds of selling the final product at current prices and the expenses of bringing the product to maturity.

Finished goods (61223)

7.83 Finished goods (61223) consist of goods that are the output of a production process, are still held by their producer, and are not expected to be processed further by the producer before being supplied to other units. Finished goods may be held only by the units that produce them. General government units will have finished goods only if they produce goods for sale or transfer to other units. Inventories of finished goods are valued at their current sales value (before adding any taxes, transport, or distribution charges) or at the cost to produce them currently (i.e., their current replacement prices).

Goods for resale (61224)

7.84 Goods for resale (61224) are goods acquired for the purpose of reselling or transferring to other units without being further processed. Goods for resale may be transported, stored, graded, sorted, washed, or packaged by their owners to present them for resale in ways that are attractive to their customers or beneficiaries, but they are not otherwise transformed. Any general government unit that sells goods for economically significant prices, such as a museum gift shop, is likely to possess an inventory of goods for resale. This category also includes goods purchased by general government units for provision free of charge or at prices that are not economically significant to other units. Goods acquired by government for distribution as social transfers in kind but that have not yet been so delivered are also included in goods for resale.

7.85 Inventories of goods intended for resale are valued at their current replacement prices.

Military inventories (61225)

7.86 Military inventories (61225) consist of single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by weapons or weapons systems. As noted in paragraph 7.74, in the discussion of weapons systems as fixed assets, most single-use items are treated as inventories, but some types of missiles with highly destructive capability may be treated as fixed assets. Military inventories are valued at their current replacement prices.

Valuables (613)

7.87 Valuables (613) are produced assets of considerable value that are not used primarily for purposes of production or consumption but are held as stores of value over time. They are expected to appreciate, or at least not to decline, in real value, and they do not deteriorate over time under normal conditions.

7.88 Included in valuables are:

  • Nonmonetary gold and other precious stones and metals that are not intended to be used as materials and supplies in the processes of production

  • Paintings, sculptures, and other objects recognized as works of art or antiques held primarily as stores of value over time

  • Jewelry of significant value fashioned out of precious stones and metals, collections, and miscellaneous other valuables.

Many items fitting the description of a valuable that are owned by general government units will be classified as machinery and equipment not elsewhere classified (611222) because they are not held primarily as stores of value but used in production, such as by being displayed in government museums. (See also paragraph 7.57.)

7.89 To the extent that there are well-organized markets for valuables, they can be valued at current market prices, including any costs of ownership transfer, such as agents’ fees or commissions. Otherwise, the amounts for which they are insured against fire, theft, and other risks may be appropriate.

Nonproduced assets (614)

7.90 Nonproduced assets consist of tangible, naturally occurring assets—natural resources—over which ownership rights are enforced, and intangible nonproduced assets (6144) that are constructs of society. Natural resources comprise land (6141), mineral and energy resources (6142), and other naturally occurring assets (6143). If ownership rights have not or cannot be enforced over naturally occurring resources, then they are not economic assets.

7.91 All immovable nonproduced assets such as land and other natural resources within the economic territory are deemed, by convention, to be owned by resident units (see paragraph 2.13).

Land (6141)

7.92 Land (6141) consists of the ground, including the soil covering and any associated surface waters, over which ownership rights are enforced and from which economic benefits can be derived by their owners by holding or using them. The associated surface water includes any reservoirs, lakes, rivers, and other inland waters over which ownership rights can be exercised and that can, therefore, be the subject of transactions between units. However, water bodies from which water is regularly extracted, against payment, for use in production (including for irrigation) are included not in water associated with land but in water resources (61432).

7.93 Land excludes the following:

  • Buildings and other structures constructed on the land or through it, such as roads, office buildings, and tunnels

  • Land improvements and the costs of ownership transfer on land

  • Cultivated components of vineyards, orchards, and other plantations of trees, animals, and crops

  • Subsoil assets

  • Noncultivated biological resources

  • Water resources below the ground.

7.94 Land is valued at its current price that would be payable by a new owner, excluding the costs of ownership transfer. By convention, the costs of ownership transfer on land are recorded as the net investment in fixed assets as part of land improvements and are subject to consumption of fixed capital. The value of land can vary enormously depending on its location and the uses for which it is suitable or sanctioned. As a result, these factors must be taken into account when the current market price for the land is determined. In a number of instances, it may be difficult to separate the value of land from the value of structures erected on the land:

  • One method of estimating the value of land separately is to calculate ratios of the value of the site to the value of the structure from valuation appraisals and to deduce the value of land from the replacement cost of the buildings or from the value on the market of the combined land and buildings.

  • When the value of land cannot be separated from the building, structure, plantation, vineyard, etc., above it, the composite asset should be classified in the category representing the greater part of its value.

  • Similarly, if the value of the land improvements (which include site clearance, preparation for the erection of buildings or planting of crops, and costs of ownership transfer) cannot be separated from the value of land in its natural state, the value of the land may be allocated to one category or the other, depending on which is assumed to represent the greater part of the value.

7.95 Land appears on the balance sheet of the legal owner except when the land is not separable from other assets that are subject to a financial lease. This may most often occur in connection with a financial lease over a building or plantation on the land, when the inseparable assets, including land, are on the balance sheet of the economic owner.22

7.96 By convention, where the legal owner of a building is not the legal owner of the land on which the building stands, but the purchase price of the building includes an upfront payment of rent on the land beneath, without any prospect of further payments being due in future, land is recorded on the balance sheet of the owner of the building on the land.

Mineral and energy resources (6142)

7.97 Mineral and energy resources (6142) consist of mineral and energy reserves located on or below the earth’s surface that are economically exploitable, given current technology and relative prices. Ownership rights to the mineral and energy resources are usually separable from those to the land itself. The deposits may be located on or below the earth’s surface, including deposits under the sea, but they must be economically exploitable. Mineral and energy resources are known reserves of oil, natural gas, coal, metallic ores (including ferrous, nonferrous, and precious metal ores), and nonmetallic mineral reserves (including stone quarries, clay and sand pits, chemical and fertilizer mineral deposits, and deposits of salt, quartz, gypsum, natural gem stones, asphalt, bitumen, and peat). Mine shafts, wells, and other subsoil extraction facilities are fixed assets in the form of other structures (61113) rather than subsoil assets.

7.98 The value of the resources is usually estimated as the present value of the expected net returns resulting from their commercial exploitation, but if the ownership of subsoil assets changes frequently on markets, then it may be possible to obtain appropriate prices. In practice, it may be necessary to use the valuations that the owners of the assets place on them in their own accounts.

7.99 It is frequently the case that the enterprise extracting a resource is different from the owner of the resource. In many countries, for example, oil resources are the property of government. However, it is the extractor who determines how fast the resource will be depleted, and since the resource is not renewable on a human time scale, it appears as if there has been a change of economic ownership to the extractor even if this is not the legal position. Nor is it necessarily the case that the extractor will have the right to extract until the resource is exhausted. Because there is no wholly satisfactory way in which to show the value of the asset split between the legal owner and the extractor, the whole of the resource is shown on the balance sheet of the legal owner and the payments by the extractor to the owner shown as rent. (This treatment is, therefore, an extension of the concept of a resource lease applied in this case to a depletable asset, as described in paragraphs 5.130 and A4.16–A4.17.)23

Other naturally occurring assets (6143)

7.100Other naturally occurring assets (6143) comprise noncultivated biological resources (61431), water resources (61432), and other natural resources (61433), as shown in Table 7.7.

Table 7.7Classification of Other Naturally Occurring Assets
6143Other naturally occurring assets
61431Noncultivated biological resources
61432Water resources
61433Other natural resources
614331Radio spectrum
614332Natural resources not elsewhere classified

7.101 Noncultivated biological resources (61431) consist of animals, birds, fish, and plants that yield both once-only and repeat products over which ownership rights are enforced but for which natural growth or regeneration is not under the direct control, responsibility, and management of any institutional units. Examples are virgin forests and fisheries that are commercially exploitable. Only those resources that have economic value that is not included in the value of the associated land are included. As observed prices are not likely to be available, such assets are usually valued at the present value of expected future returns (see paragraph 7.33).

7.102 Water resources (61432) consist of surface and groundwater resources used for extraction to the extent that their scarcity leads to the enforcement of ownership or use rights, market valuation, and some measure of economic control. As observed prices are not likely to be available, such assets are usually valued at the present value of expected future returns.

7.103 The category other natural resources (61433) includes the electromagnetic spectrum, which includes the range of radio frequencies used in the transmission of sound, data, and television. The value of the spectrum is usually determined as the present value of expected future returns. If a long-term contract to use the spectrum exists, its value could be used as a basis for estimating the total value of the asset. Given the tendency to implement environmental policy by means of market instruments, it may be that additional natural resources will come to be recognized as economic assets. (See also paragraphs A4.18–A4.40 and A4.48–A4.50 on the treatment of permits and licenses to use natural resources.)

Intangible nonproduced assets (6144)

7.104 Intangible nonproduced assets (6144) are constructs of society evidenced by legal or accounting actions. Such assets entitle their owners to engage in certain specific activities or to produce certain specific goods or services and to exclude other units from doing so except with the permission of the owner. The owners of the assets may be able to earn monopoly profits by restricting the use of the assets to themselves. Two types of intangible nonproduced assets are distinguished: contracts, leases, and licenses (61441) and goodwill and marketing assets (61442), as shown in Table 7.8. Whenever possible, contracts, leases, and licenses, should be valued at current prices when they are actually traded on markets. Otherwise, it may be necessary to use estimates of the present value of expected future returns. Goodwill and marketing assets are typically valued at their initial acquisition costs minus allowances for amortization (see paragraph 10.55).

Table 7.8Classification of Intangible Nonproduced Assets
6144Intangible nonproduced assets
61441Contracts, leases, and licenses
614411Marketable operating leases
614412Permits to use natural resources
614413Permits to undertake specific activities
614414Entitlement to future goods and services on an exclusive basis
61442Goodwill and marketing assets

Contracts, leases, and licenses (61441)

7.105 Contracts, leases, and licenses (61441) are treated as assets only when both the following conditions are satisfied:

  • The terms of the contract, lease, or license specify a price for the use of an asset or provision of a service that differs from the price that would prevail in the absence of the contract, lease, or license.

  • One party to the contract must be able legally and practically to realize this price difference.

7.106 These kinds of contracts are regarded as assets only if the existence of the legal agreement confers benefits on the holder in excess of the price payable to the lessor, owner of the natural resource, or permit issuer,24 and the holder can realize these benefits legally and practically (i.e., if a market for the contract exists). It is recommended that in practice, contracts, leases, and licenses should be recorded only when the value of the asset is significant and if holders can actually exercise the right to realize the price difference by on-selling the asset. In this case, a suitable market price necessarily exists. The asset does not exist beyond the length of the contract agreement, and its value must be reduced accordingly as the remaining contract period shortens (see paragraph 10.53).

7.107 Contracts, leases, and licenses may be marketable operating leases (614411), permits to use natural resources (614412), permits to undertake specific activities (614413), and entitlement to future goods and services on an exclusive basis (614414).25

Marketable operating leases (614411)

7.108 Marketable operating leases (614411) are third-party property rights relating to fixed assets. The lease confers economic benefits to the holder in excess of the fees payable and the holder can realize these benefits legally and practically, through transferring them. An example is where a tenant of a building has a fixed rental but the building could fetch a higher rental in the absence of the lease. If, in these circumstances, the tenant is able both legally and practically to sublet the building, then the tenant has an asset of the type of a marketable operating lease.

Permits to use natural resources (614412)

7.109 Permits to use natural resources (614412) are third-party property rights relating to natural resources. An example is where an institutional unit holds a fishing quota and is able, again both legally and practically, to sell this to another unit. Payment for a mobile phone license constitutes the sale of an asset, not payment for rent, when the licensee acquires effective economic ownership rights over the use of the spectrum. To decide whether ownership is effectively transferred, the six criteria quoted in Box A4.1 are to be considered.

Permits to undertake specific activities (614413)

7.110 A permit to undertake a specific activity (614413) is an asset for the holder when: (i) the permits are limited in number and so allow the holders to earn monopoly profits, (ii) the monopoly profits do not come from the use of an asset belonging to the permit-issuer, and (iii) a permit holder is able both legally and practically to sell the permit to a third party. Such permits are issued mainly by government but may also be issued by other units.

7.111 When governments restrict the number of cars entitled to operate as taxis or limit the number of casinos by issuing permits or licenses, they are in effect creating monopoly profits for the approved operators and recovering some of the profits as the “fee.” For government, such proceeds are recorded as other taxes on the use of goods and on permission to use goods or perform activities (11452) (see paragraph 5.81). For the permit holder, the incentive to acquire such a license is that the licensee believes that it will thereby acquire the right to make monopoly profits at least equal to the cost of the license. This permission to create monopoly profits creates an asset for the holder if the licensee can realize these profits by on-selling the asset—that is, the license is tradable. The value of this asset is determined by the value at which it can be sold or, if no such information is available, is estimated as the present value of the future stream of monopoly profits (see also paragraphs A4.42–A4.45).

Entitlement to future goods and services on an exclusive basis (614414)

7.112 Entitlement to future goods and services on an exclusive basis (614414) relates to the case where one party that has contracted to purchase goods or services at a fixed price at a time in the future is able to transfer the obligation of the second party to the contract to a third party. These entitlements relate to footballers’ contracts and a publisher’s exclusive right to publish new works by a named author or issue recordings by named musicians (see also paragraph A4.51). For example, when a football player contracted his or her services to a club, the latter has an asset with the ability to sell this contract to another club.

Goodwill and marketing assets (61442)

7.113 Potential purchasers of an enterprise are often prepared to pay a premium above the net value of its individually identified and valued assets and liabilities. This excess is described as goodwill and reflects the value of corporate structures and the value to the business of an assembled workforce and management, corporate culture, distribution networks, and customer base. It may not have value in isolation from other assets, but it enhances the value of those other assets. Looked at another way, it is the addition to the value of individual assets because they are used in combination with each other.

7.114 Goodwill cannot be separately identified and sold to another party. The value has to be derived by deducting the value of assets and liabilities classified elsewhere within the asset boundary of GFS from the sale value of the corporation. (In practice, since it is estimated as a residual, an estimate of goodwill will also reflect errors and omissions in the valuation of other assets and liabilities.)

7.115 As well as residual errors, the value of goodwill may include the value to the corporation of items known as marketing assets. Marketing assets consist of items such as brand names, mastheads, trademarks, logos, and domain names. A brand can be interpreted as far more than just a corporate name or logo. It is the overall impression a customer or potential customer gains from his or her experience with the company and its products. Interpreted in that wider sense it can also be seen to encompass some of the characteristics of goodwill, such as customer loyalty.

7.116 The value of goodwill and marketing assets is the difference between the value paid for an enterprise as a going concern and the sum of its assets minus the sum of its liabilities, each item of which has been separately identified and valued. Although goodwill is likely to be present in most corporations, for reasons of reliability of measurement it is recorded in GFS only when its value is evidenced by a market transaction, usually the sale of the whole corporation. In some exceptions, identified marketing assets may be sold individually and separately from the whole corporation, in which case their value should also be recorded under this item.

7.117 The balance sheet entry for goodwill and marketing assets is the written-down value of the entry that appears as a transaction in financial assets and liabilities when an enterprise is taken over or when a marketing asset is sold.26 These entries are not revalued.

Financial Assets (62) and Liabilities (63)

7.118 Financial assets and liabilities were defined in paragraphs 7.15–7.16. The classifications of financial assets and liabilities are based primarily on the liquidity and legal characteristics of the instruments that describe the underlying creditor-debtor relationships. The liquidity of a financial instrument embraces characteristics such as negotiability, transferability, marketability, and convertibility.

7.119 Securities are debt and equity instruments that have the characteristic feature of negotiability. That is, their legal ownership is readily transferred from one unit to another unit by delivery or endorsement. While any financial instrument can potentially be traded, securities are designed to be traded, usually on organized exchanges or “over the counter.” (The over-the-counter market involves parties negotiating directly with one another, rather than on a public exchange.) Negotiability is a matter of the legal form of the instrument. Some securities may be legally negotiable, but there is not, in fact, a liquid market where they can be readily bought or sold. Listed financial derivatives, such as warrants, are sometimes considered to be securities.

7.120 In addition to classifying financial assets and liabilities by the characteristics of the financial instrument, they can also be classified according to the residence of the other party to the instrument (the debtors for financial assets and the creditors for liabilities).27 Residence is defined in paragraphs 2.6–2.21. The classifications of financial assets and liabilities by instrument are shown in Table 7.9.

Table 7.9Classification of Financial Assets and Liabilities by Instrument and Residence of the Counterparty
62Financial assets63Liabilities
6201Monetary gold and Special Drawing Rights

(SDRs)
6301Special Drawing Rights (SDRs)
62011Monetary gold
62012Special Drawing Rights (SDRs)
6202Currency and deposits6302Currency and deposits
6203Debt securities6303Debt securities
6204Loans6304Loans
6205Equity and investment fund shares6305Equity and investment fund shares
62051Equity63051Equity
62052Investment fund shares or units63052Investment fund shares or units
6206Insurance, pension, and standardized guarantee schemes [GFS]6306Insurance, pension, and standardized guarantee schemes [GFS]
62061Nonlife insurance technical reserves63061Nonlife insurance technical reserves
62062Life insurance and annuities entitlements63062Life insurance and annuities entitlements
62063Pension entitlements [GFS]63063Pension entitlements [GFS]
62064Claims of pension funds on pension manager63064Claims of pension funds on pension manager
62065Provisions for calls under standardized guarantee schemes63065Provisions for calls under standardized guarantee schemes
6207Financial derivatives and employee stock options6307Financial derivatives and employee stock options
62071Financial derivatives63071Financial derivatives
62072Employee stock options63072Employee stock options
6208Other accounts receivable6308Other accounts payable
62081Trade credit and advances63081Trade credit and advances
62082Miscellaneous other accounts receivable63082Miscellaneous other accounts payable
621Domestic debtors631Domestic creditors
6212–Same instrument breakdown as above, but6312–Same instrument breakdown as above, but
6218excluding monetary gold and SDRs6318excluding SDRs
622External debtors632External creditors
6221–Same instrument breakdown as above6321–Same instrument breakdown as above
62286328

7.121 Because a given financial instrument creates both a financial asset and a liability, the same descriptions of instruments can be used for both. For simplicity, the descriptions will refer only to financial assets unless there is a specific need to refer to liabilities.

7.122 As discussed in paragraphs 3.113 and 7.20–7.25, in principle, all financial assets should be valued at market value.28 Because the creditor can dispose of the asset on the date of the balance sheet at its current market price, it is that price that is relevant for the balance sheet. In practice, valuing debt instruments29 at market value on the balance sheet date means that:

  • Debt securities are valued at market prices.

  • Insurance, pension, and standardized guarantee schemes are valued according to principles that are equivalent to market valuation.

  • All other debt instruments are valued at nominal prices, which are considered to be the best generally available estimates of their market prices.

7.123 Some financial assets and liabilities, most typically deposits, debt securities, loans, and other accounts payable/receivable, require the debtor to pay interest. The interest accrues continuously and increases the total amount that the debtor will be required to pay (see paragraph 6.64).

7.124 To calculate the overall balance (see paragraph 4.57) financial assets acquired by government units in support of their fiscal policies30 are classified differently from financial assets acquired for liquidity management. The distinction between financial assets acquired for public policy purposes and financial assets acquired for liquidity purposes is not included in the GFS classification of financial assets. This distinction rests on the judgment of the analyst of the particular purpose for employing financial assets.31

Monetary gold and Special Drawing Rights (SDRs) (6201, 6221, 6301, 6321)

7.125 On the financial assets side, this category comprises monetary gold and SDRs, and on the liabilities side it comprises only SDRs (see paragraph 7.128). The counterparties to this financial asset and liability are nonresidents.

Monetary gold (62011, 62211)32

7.126 Monetary gold is gold to which the monetary authorities (or others who are subject to the effective control of the monetary authorities) have title and is held as a reserve asset. It comprises gold bullion (including gold held in allocated gold accounts) and unallocated gold accounts with nonresidents that give title to claim the delivery of gold.33 All monetary gold is included in reserve assets or is held by international financial organizations. Only gold that is held as a financial asset and as a component of reserve assets is classified as monetary gold. Therefore, except in limited institutional circumstances,34 gold bullion is a financial asset only for the central bank or central government. Deposits, loans, and securities denominated in gold are treated, respectively, as deposits, loans, and securities denominated in foreign currencies, and not as monetary gold, unless held as unallocated gold accounts by monetary authorities as reserve assets.

7.127 Allocated gold accounts provide ownership of a specific piece of gold. The ownership of the gold remains with the entity placing it for safe custody. When held as reserve assets, allocated gold accounts are classified as monetary gold. Otherwise, allocated gold accounts are treated as representing the ownership of a nonfinancial asset. In contrast, unallocated gold accounts represent a claim against the account custodian to deliver gold. For these accounts, the account provider holds title to a reserve base of physical gold and issues claims to account holders denominated in gold. When held as reserve assets, unallocated gold accounts are classified as monetary gold. Unallocated accounts not held as reserve assets, and all unallocated gold account liabilities, are classified as deposits.

7.128 Gold bullion takes the form of coins, ingots, or bars with a purity of at least 995 parts per 1,000, including such gold held in allocated gold accounts. Gold bullion is usually traded on organized markets or through bilateral arrangements between central banks. Gold bullion held as a reserve asset is the only financial asset with no corresponding liability.

7.129 Any gold held by a government unit that does not satisfy the definition of monetary gold is not a financial asset and is included in nonmonetary gold as a nonfinancial asset, most likely valuables (613) but possibly inventories (612).35 In some cases, a central bank may own gold bullion that is not held as reserves, such as sometimes occurs when it acts as a monopoly reseller of mined gold. A gold swap is treated as a loan (see paragraph 7.161).

7.130 Monetary gold is valued at the price established in organized markets or when traded through bilateral arrangements between central banks.

Special Drawing Rights (SDRs) (62012, 62212, 6301, 6321)

7.131 Special Drawing Rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF) and allocated to its members to supplement reserve assets. The Special Drawing Rights Department of the IMF allocates SDRs among member countries of the IMF (collectively known as the participants). The allocation of SDRs is a liability of the member country and interest accrues on this liability.36

7.132 SDR holdings represent each holder’s unconditional right to obtain foreign exchange or other reserve assets from other IMF members. These financial assets represent claims on the participants in the IMF’s SDR Department collectively and not on the IMF. A participant may sell some or all of its SDR holdings to another participant and receive other reserve assets, particularly foreign exchange, in return. Participants may also use SDRs to meet liabilities.

7.133 SDR allocations constitute a (debt) liability of the recipients (and part of the public sector’s debt liabilities) and the SDR holdings are part of the public sector’s financial assets. The allocation and holdings are recorded on a gross basis. The macroeconomic statistical guidelines do not specify on whose balance sheet SDR holdings and allocations should be recorded (e.g., the central bank or a general government entity such as the ministry of finance or treasury). This is because SDR allocations are made to IMF members that are participants in the SDR Department of the IMF, and it is for those members to follow domestic legal and institutional arrangements to determine the ownership and recording of SDR allocations and SDR holdings in the public sector. Given that financial claims on and liabilities to members in the SDR system are attributed on a cooperative basis, a residual partner category—other nonresidents—is used as the counterparty to SDR holdings and allocations.

7.134 In addition to SDRs as a type of financial instrument, SDRs may also be used as a unit of account in which other debt instruments can be expressed. The value of the SDR is determined daily by the IMF on the basis of a selected basket of currencies. To ensure consistency, the SDR rates against domestic currencies are obtainable from the IMF. Both the basket and the weights of the currencies that make up the SDR basket are revised from time to time.

Currency and deposits (6202, 6212, 6222, 6302, 6312, 6322)

7.135 Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. All sectors may hold currency as assets, but normally only central banks and government may issue currency. In some countries, commercial banks are able to issue currency under the authorization of the central bank or government. Currency constitutes a liability of the issuing units. Unissued currency held by a public sector unit is not treated as a financial asset of the public sector or a liability of the central bank. Gold and commemorative coins that are not in circulation as legal tender, or as monetary gold, are classified as nonfinancial assets in the form of valuables or inventories of materials and supplies, as appropriate, rather than currency.

7.136 A distinction should be drawn between domestic currency that is a liability of a resident unit and foreign currency that is the liability of nonresident units. (See paragraph 3.134 for the definitions of domestic and foreign currency.) Domestic currency has a fixed nominal value. The value of foreign currency is converted to the domestic currency at the exchange rate valid on the date to which the balance sheet relates. The rate used should be the midpoint between the buying and selling spot rates for currency transactions.

7.137 Deposits are all claims, represented by evidence of deposit, on the deposit-taking corporations (including the central bank) and, in some cases, general government or other institutional units. A deposit is usually a standard contract, open to the public at large, that allows the placement of a variable amount of money. Public sector units may hold a variety of deposits as assets, including deposits in foreign currencies. It is also possible for a government unit to incur liabilities in the form of deposits. For example, postal offices or other government units may accept deposits from the public, acting like a sort of rural financial institution as a secondary activity. Public financial corporations (e.g., the central bank) typically incur liabilities in the form of deposits, including to government units.

7.138 Claims on the IMF that are components of international reserves and are not evidenced by loans should be classified as deposits. (Claims on the IMF evidenced by loans should be included in loans.) Repayable margin payments in cash related to financial derivative contracts (see paragraph 7.219) can also be classified under deposits.

7.139 Unallocated accounts for precious metals, such as unallocated gold accounts, are also deposits, except for unallocated gold accounts held by monetary authorities for reserves purposes, for which the asset holding is included in monetary gold, with the counterpart liability being recorded as a deposit (as also mentioned in paragraph 7.15).

7.140 Deposits may be transferable or nontransferable. Transferable deposits comprise all deposits that are (i) exchangeable (without penalty or restriction) on demand at par, and (ii) directly usable for making third-party payments by check, draft, giro order, direct debit/credit, or other direct payment facility. Nontransferable deposits comprise all other financial claims, other than transferable deposits, represented by evidence of deposit. Examples of other deposits are sight deposits that permit immediate cash withdrawals but not direct third-party transfers, savings and fixed-term deposits, overnight and very short-term repurchase agreements that are included in the national measures of broad money, and foreign currency deposits that are blocked because of the rationing of foreign exchange as a matter of national policy.

7.141 It may be useful to further classify deposits according to whether they are denominated in the domestic currency or a foreign currency.

7.142 Deposits should be recorded at nominal value. They give rise to the same issues as loans with respect to nominal and fair values (see paragraph 7.163). Deposit assets at banks and other public deposit-taking corporations in liquidation also should be recorded at their nominal value until they are written off. If the difference between the nominal and fair values is significant, the fair value of such deposits could be shown as an additional memorandum item to the balance sheet. The same treatment is applicable for any other cases of impaired deposits (i.e., where the public deposit-taking corporation is not in liquidation but is insolvent).

Debt securities (6203, 6213, 6223, 6303, 6313, 6323)

7.143 Debt securities are negotiable financial instruments serving as evidence of a debt. The security normally specifies a schedule for interest and principal payable. Examples of debt securities are:

  • Bills

  • Bonds and debentures, including bonds that are convertible into shares

  • Loans that have become negotiable from one holder to another

  • Nonparticipating preferred stocks or shares

  • Asset-backed securities and collateralized debt obligations

  • Similar instruments normally traded in the financial markets.

7.144 Bills are defined as securities (usually short-term) that give holders the unconditional rights to receive stated fixed sums on a specified date. Bills are issued and usually traded in organized markets at discounts to face value that depend on the rate of interest and the time to maturity. Examples of bills are treasury bills, negotiable certificates of deposit, bankers’ acceptances, promissory notes, and commercial paper.

7.145 A banker’s acceptance is created when a financial corporation endorses, in return for a fee, a draft or bill of exchange and the unconditional promise to pay a specific amount at a specified date. International trade is often financed in this way. A banker’s acceptance is classified under the category of debt securities. A banker’s acceptance represents an unconditional claim on the part of the holder and an unconditional liability on the part of the accepting financial corporation; in turn, the financial corporation acquires an asset because it has a claim on its customer. A banker’s acceptance is treated as a financial asset from the time of acceptance, even though funds may not be exchanged until a later stage.37

7.146 Bonds and debentures are securities that give the holders the unconditional right to fixed payments or contractually determined variable payments on a specified date or dates. The earning of interest is not dependent on earnings of the debtors. Bonds and debentures could have various characteristics and uses. For example, bonds may be issued to recognize a liability for government employee pensions (often called recognition bonds). Bonds can be issued at a deep discount or with no coupons (zero-coupon bonds).

7.147 Zero-coupon bonds are long-term securities that do not involve periodic payments during the life of the bond. Similar to short-term securities, zero-coupon bonds are sold at a discount, and a single payment, that includes accrued interest, is made at maturity.38Deep-discount bonds are long-term securities that require periodic coupon payments during the life of the instrument, but the amount is substantially below the market rate of interest at issuance.

7.148 Instruments with embedded derivatives39 are not classified as financial derivatives. If a primary instrument, such as a security or loan, contains an embedded derivative, the instrument is valued and classified according to its primary characteristics—even though the value of that security or loan may well differ from the values of comparable securities and loans because of the embedded derivative. Examples are corporate bonds that are convertible into shares of the same corporation at the option of the bondholder and securities with options for repayment of principal in currencies that differ from those in which the securities were issued. If the conversion option is traded separately, then the option is treated as a separate instrument, classified as a financial derivative, and it is not debt.

7.149 Loans (see paragraph 7.157) that have become negotiable from one holder to another are to be reclassified (through other changes in the volume of assets) from loans to debt securities under certain circumstances. For such reclassification, there needs to be evidence of secondary market trading, including the existence of market makers, and frequent quotations of the instrument, such as provided by bid-offer spreads.40

7.150 Nonparticipating preferred stocks or shares are those that pay a fixed income but do not provide for participation in the distribution of the residual value of an incorporated enterprise on dissolution. These shares are classified as debt securities. Bonds that are convertible into equity should also be classified as debt securities prior to the time that they are converted.

7.151 Asset-backed securities and collateralized debt obligations are arrangements under which payments of interest and principal are backed by payments on specified assets or income streams. This process is also described as securitization (for more details, see paragraph A3.59–A3.66). Asset-backed securities are backed by various types of financial assets—for example, mortgages and credit card loans. A general government unit may issue debt securities backed by specific streams of earmarked revenue. This is not an asset-backed security, as in macroeconomic statistical systems, the ability to raise taxes or other government revenue is not recognized as a government asset that could be used for securitization. Nevertheless, the earmarking of future revenue, such as receipts from toll roads, to service debt securities issued by a general government (or public sector) unit may resemble securitization.

7.152 Stripped securities are securities that have been transformed from a principal amount with coupon payments into a series of zero-coupon bonds, with a range of maturities matching the coupon payment date(s) and the redemption date of the principal amount(s). The function of stripping is that investor preferences for particular cash flows can be met in ways different from the mix of cash flows of the original security. There are two cases of stripped securities:

  • When a third party acquires the original securities and uses them to back the issue of the stripped securities; then new funds have been raised and there is a new financial instrument.

  • When no new funds are raised and the payments on the original securities are stripped and marketed separately by the issuer or through agents (such as strip dealers) acting with the issuer’s consent; in this case, there is no new instrument.

7.153 Index-linked securities are instruments for which either the coupon payments (interest) or the principal or both are linked to another item, such as a price index, an interest rate, or the price of a commodity. Issues in the measurement of interest on index-linked securities are discussed in paragraphs 6.75–6.78.

7.154 Debt securities traded (or tradable) in organized and other financial markets—such as bills, bonds, debentures, negotiable certificates of deposits, asset-backed securities—should be valued at both market and nominal value. Debt securities are shown in the balance sheet at market value. The nominal value is used to determine gross debt at nominal value, which is shown as a memorandum item to the GFS balance sheet. For a traded debt security, nominal value can be determined from the value of the debt at creation and subsequent economic flows, while market value is based on the price at which it is traded in a financial market.

7.155 For debt securities that are tradable but for which the market price is not readily observable, the market value can be estimated by the discounted present value method provided an appropriate discount rate can be used (see paragraph 3.125). This and other methods of estimating market value are explained in the PSDS Guide, Box 2.2.

7.156 When securities are quoted on markets with a buy-sell spread, the midpoint should be used to value the instrument. The spread is an implicit service fee of the market platform or dealer payable by buyers and sellers.

Loans (6204, 6214, 6224, 6304, 6314, 6324)

7.157 A loan is a financial instrument that is created when a creditor lends funds directly to a debtor and receives a nonnegotiable document as evidence of the asset.41 This category includes overdrafts, mortgage loans, loans to finance trade credit and advances, repurchase agreements, financial assets and liabilities created by financial leases, and claims on or liabilities to the IMF in the form of loans. Trade credit and advances and similar accounts payable/receivable are not loans (see paragraph 7.225). Loans that have become marketable in secondary markets should be reclassified under debt securities (see paragraph 7.149). However, if traded only occasionally, the loan is not reclassified under debt securities.

7.158 A financial lease involves imputing a loan. A financial lease is a contract under which the lessor, as legal owner of an asset, conveys substantially all risks and rewards of ownership of the asset to the lessee. When goods are acquired under a financial lease, the lessee is deemed to be the owner, even though legally the leased good remains the property of the lessor. This is because the risks and rewards of ownership have been, de facto, transferred to the lessee. This change in ownership is deemed to have been financed by an imputed loan, which is an asset of the lessor and a liability of the lessee.

7.159 A securities repurchase agreement (repo) is an arrangement involving the sale of securities for cash, at a specified price, with a commitment to repurchase the same or similar securities at a fixed price either on a specified future date (often one or a few days hence) or with an open maturity.42 The economic nature of the transaction is that of a collateralized loan (or a deposit43) because the risks and rewards of ownership of the securities remain with the original owner (security provider). Thus, the funds advanced by the security taker (cash provider) to the security provider (cash taker) are treated as a loan and the underlying securities remain on the balance sheet of the security provider, despite the legal change in ownership.

7.160 Securities lending is an arrangement whereby a security holder transfers securities to another party (security taker), subject to the stipulation that the same or similar securities be returned on a specified date or on demand. As with a securities repurchase agreement, the risks and rewards of ownership remain with the original owner. If the security taker provides cash as collateral, then the arrangement is a repo (see paragraph 7.159). If the security taker provides noncash collateral, then no stock position changed. In either case, the securities involved remain on the balance sheet of the original owner.

7.161 A gold swap involves an exchange of gold for foreign exchange deposits with an agreement that the transaction be reversed at an agreed future date at an agreed gold price. The gold taker (cash provider) should not record the gold on its balance sheet, while the gold provider (cash taker) should not remove the gold from its balance sheet. Gold swaps are similar to securities repurchase agreements, except that the collateral is gold, and should therefore be recorded as a collateralized loan or deposit. Gold loans occur in the same form as securities lending and should be treated in the same way.

7.162 An off-market swap is a swap contract44 that has a nonzero value at inception as a result of having reference rates priced differently from current market values—that is, “off-the-market.” Such a swap results in a lump sum being paid, usually at inception, by one party to the other. The economic nature of an off-market swap is equivalent to a combination of borrowing (i.e., the lump sum), in the form of a loan, and an on-market swap (financial derivative).45

7.163 Loans are recorded at nominal value (i.e., the amount advanced plus interest accrued and not paid minus any repayments). The use of nominal values is partly influenced by pragmatic concerns about data availability. In addition, because loans are generally not intended for trading on the secondary market, estimating a market price can be subjective. Nominal value is also useful because it shows actual legal liability and the starting point of creditor recovery behavior. In some cases, loans may be traded, often at discount, or a fair value may exist or could be estimated. It is recognized that nominal value provides an incomplete view of the financial position of the creditor, particularly when the loans are nonperforming. In such cases, information on the nominal value, as well as the fair value, of nonperforming loan assets should be included as a memorandum item to the GFS balance sheet—see paragraph 7.262.

Equity and investment fund shares (6205, 6215, 6225, 6305, 6315, 6325)

7.164 Equity and investment fund shares have the distinguishing feature that the holders own a residual claim on the assets of the institutional unit that issued the instrument. Equity represents the owners’ funds in the institutional unit. In contrast to debt, equity does not generally provide the owner with a right to a predetermined amount or an amount determined according to a fixed formula. Investment fund shares have a specialized role in financial intermediation as a kind of collective investment in other assets, and should be identified separately. When an institutional unit’s net worth is calculated, equity and investment fund shares are, by convention, included in total liabilities (see paragraphs 7.228–7.233).

Equity (62051, 62151, 62251, 63051, 63151, 63251)

7.165 Equity consists of all instruments and records that acknowledge claims on the residual value of a corporation or quasi-corporation, after the claims of all creditors have been met. Equity is treated as a liability of the issuing institutional unit (a public corporation or other government unit).

7.166 Ownership of equity in legal entities is usually evidenced by shares, stocks, participations, depository receipts, or similar documents. Shares and stocks have the same meaning. Participating preferred shares are those that provide for participation in the residual value on the dissolution of an incorporated enterprise. Such shares are also equity securities, regardless of whether the income is fixed or determined according to a formula. (For nonparticipating preferred shares, see paragraph 7.150.) In addition to the purchase of shares, the value of equity can be affected by a range of factors, such as share premiums, accumulated reinvested or retained earnings, or revaluations. In addition, a direct investor may increase its equity in an affiliate by providing goods and services or assuming debt.

7.167 Depository receipts are securities that represent ownership of securities listed in other economies. Depository receipts listed on one exchange represent ownership of securities listed on another exchange, and ownership of the depository receipts is treated as if it represents direct ownership of the underlying securities. Depository receipts facilitate transactions in securities in economies other than their home listing. The underlying securities may be equity or debt securities.

7.168 Equity may be subdivided into listed shares, unlisted shares, and other equity. Both listed and unlisted shares are equity securities (securities are defined in paragraph 7.119). Listed shares are equity securities listed on an exchange and may be referred to as quoted shares. Unlisted shares are equity securities not listed on an exchange. Listed and unlisted shares tend to be issued by different types of corporations (unlisted shares are often issued by subsidiaries and smaller businesses) and typically have different regulatory requirements.

7.169 Other equity is equity that is not in the form of securities. This can include equity in quasi-corporations, such as branches, trusts, limited liability and other partnerships, unincorporated funds, and notional units for ownership of real estate and other natural resources. The ownership of many international organizations is not in the form of shares and should be classified as other equity (although equity in the Bank for International Settlements is in the form of unlisted shares). Ownership of currency union central banks is included in other equity.46

7.170 Most general government units do not have liabilities in the form of equity and investment fund shares. However, in two cases, it is possible to show a general government unit with liabilities for equity and investment fund shares. The first relates to some units (usually special purpose entities) that are established legally as public corporations but carry out only fiscal and quasi-fiscal activities—they are treated as part of general government (regardless of their legal status) because they are not considered to be separate institutional units, unless they are nonresident. Second, when a unit under the control of government is legally established as a corporation but functions as a nonmarket producer, such a unit is also part of general government, as explained in paragraph 2.41.

7.171 The general principles of valuation at market prices given in paragraphs 7.20–7.33 apply to equity. Equity can be readily valued at its current market prices when it is regularly traded on stock exchanges or other financial markets.

7.172 However, there may be no observable market prices for unlisted shares and other equity positions (e.g., for equity in direct investment enterprises, unlisted and delisted companies, listed but illiquid companies, joint ventures, and unincorporated enterprises).

7.173 When actual market values of equity are not available, an estimate is required. One approach is to use information from the stock market on a similar listed share, as described in paragraph 7.29. Alternative methods of approximating the market value of shareholders’ equity are outlined in 2008 SNA, paragraphs 13.71–13.73, and include the following: recent transaction price, net asset value, present value/price to earnings ratios, book values reported by enterprises with macro-level adjustments by the statistics compilers, own funds at book value, and apportioning global value. The value of other equity is equal to the value of the unit’s assets minus the value of its liabilities. So for unincorporated enterprises, such as quasi-corporations, net worth is zero and the estimated value of other equity can be negative if the value of liabilities exceeds the value of the assets.47

Investment fund shares or units (62052, 62152, 62252, 63052, 63152, 63252)

7.174 Investment funds are collective investment undertakings through which investors pool funds for investment in financial or nonfinancial assets. These funds issue shares (if a corporate structure is used) or units (if a trust structure is used). Investment funds include money market funds (MMF) and non-MMF investment funds.48 Investment fund shares or units refer to the shares issued by mutual funds and unit trusts, rather than the shares they may hold.

7.175 MMFs are investment funds that invest only or primarily in short-term money market securities, such as treasury bills, certificates of deposit, and commercial paper. MMF shares and units sometimes are functionally close to transferable deposits—for example, accounts with unrestricted check-writing privileges. If MMF shares are included in broad money in the reporting economy, they should be recorded as a separate item in the balance sheet to allow reconciliation with monetary statistics.

7.176 Investment funds invest in a range of assets, such as debt securities, equity, commodity-linked investments, real estate, shares in other investment funds, and structured assets.

7.177 Shares (or units) in money market funds or in other investment funds should be valued in a manner similar to the methods under equity:

  • Listed shares should be valued using the market price of the share.

  • Unlisted shares should be valued according to one of the methods described in paragraph 7.172 for unlisted equity and other equity.

Insurance, pension, and standardized guarantee schemes [GFS] (6206, 6216, 6226, 6306, 6316, 6326)

7.178 Insurance, pension, and standardized guarantee schemes comprise:

  • Nonlife insurance technical reserves

  • Life insurance and annuities entitlements

  • Pension entitlements [GFS]

  • Claims of pension funds on pension manager

  • Provisions for calls under standardized guarantee schemes.

7.179 These reserves, entitlements, and provisions for calls represent liabilities of a public sector unit as the insurer, pension fund, or issuer of standardized guarantees, and corresponding assets of the policyholders or beneficiaries. In the public sector, it is usually public financial corporations that engage in insurance schemes. General government units may incur liabilities for these reserves, entitlements, and provisions as operators of nonlife insurance schemes, nonautonomous or unfunded pension schemes, and standardized guarantee schemes.49

7.180 The value of a public sector unit’s assets in the form of insurance, pension, and standardized guarantee schemes—as a policyholder—is determined by the amount of prepaid premiums plus estimates for claims established but not yet received by the public sector unit. The value of a public sector unit’s liabilities in the form of each of these instruments is discussed under the relevant instrument.

7.181 In general, insurance companies and operators of pension funds and standardized guarantee schemes make actuarial estimates of their liabilities under these schemes. These estimates will be the usual source to compile statistics for this instrument.

7.182 The following paragraphs briefly define the types of reserves, entitlements, and provisions applicable to insurance, pension, and standardized guarantee schemes.50

Nonlife insurance technical reserves (62061, 62161, 62261, 63061, 63161, 63261)

7.183 Nonlife insurance51technical reserves consist of (i) prepayments of net nonlife insurance premiums and (ii) reserves to meet outstanding nonlife insurance claims. In other words, nonlife insurance technical reserves consist of premiums paid but not yet earned (called unearned premiums) and claims incurred but not yet settled.

7.184 Prepayments of net nonlife insurance premiums arise because premiums are usually payable at the beginning of the period covered by the policy. However, on an accrual basis, the premiums are earned through the policy period, so that the initial payment involves a prepayment or advance. At any given time, part of the insurance premiums already paid has not yet been earned by the insurance enterprise because these prepaid premiums provide coverage against risks in the future. The value of the prepaid or unearned premiums should be determined proportionally. For example, if an annual policy with a premium of 120 currency units comes into force on April 1 and accounts are being prepared for a calendar year, the premium earned in the calendar year is 90. The prepaid or unearned premium is the amount of the actual premium received that relates to the period past the reporting point. In the example just given, there will be an unearned premium of 30 at the end of December. This unearned premium is intended to provide coverage for the first three months of the next year.

7.185 Reserves to meet outstanding nonlife insurance claims are amounts arising from events that have occurred but for which the claims are still pending. They also include reserves for unexpired risks. The liability incurred by the insurer to meet outstanding claims represents the present value of the amounts expected to be paid out in settlement of claims, including disputed claims, as well as allowances for claims for incidents that have taken place but have not yet been reported.

7.186 Other reserves, such as equalization reserves, may be identified by insurers. However, these are recognized as liabilities (and corresponding assets) only when there is an event that gives rise to a liability. Otherwise, equalization reserves are internal accounting entries by the insurer that represent saving to cover irregularly occurring catastrophes, and thus do not represent any existing corresponding claims for policyholders.

Life insurance and annuities entitlements (62062, 62162, 62262, 63062, 63162, 63262)

7.187 Life insurance and annuities entitlements are financial claims policyholders have against an enterprise offering life insurance or providing annuities. This category consists of liabilities of life insurance companies and annuity providers for prepaid premiums and accrued liabilities to life insurance policyholders and beneficiaries of annuities. Life insurance and annuity entitlements are the obligation to provide benefits to policyholders, or to compensate beneficiaries upon the death of policyholders,52 and thus are kept separate from shareholders’ funds. These entitlements are regarded as liabilities of the insurance companies and assets of the policyholders and beneficiaries. Annuities entitlements are the actuarial calculation of the present value of the obligations to pay future income until the death of the beneficiaries.

7.188 The amount to be recorded as the stock positions for life insurance and annuities entitlements is similar to that for nonlife insurance technical reserves in that it represents obligations to meet future claims already accrued. However, in the case of life insurance, the level of the entitlements is considerable and represents the present value of all expected future benefits.53

Pension entitlements [GFS]54 (62063, 62163, 62263, 63063, 63163, 63263)

7.189 As explained in paragraphs A2.5–A2.7, entitlements to social insurance benefits are divided between those relating to pensions and those relating to all other forms of benefits (i.e., nonpensions). The distinction between the two is important because the GFS recognizes liabilities for employment-related pensions, regardless of whether there are actually assets set aside to meet the entitlements, but recognizes reserves for employment-related nonpension benefits only when these reserves actually exist (see paragraph 7.195). Furthermore, a distinction is made between social security schemes and employment-related schemes. This section deals with entitlements to employment-related pension schemes.

7.190 Pension entitlements are financial claims that existing and future pensioners55 hold against either their employer or a fund designated by the employer, to pay pensions earned as part of a compensation agreement between the employer and employee. The nature of these claims, and the corresponding liabilities of the units operating the pension funds, depends on the type of benefit promised.

7.191 The two main types of pension schemes are defined-benefit schemes and defined-contribution schemes.56 In a defined-benefit scheme, the level of pension benefits promised by the employer to participating employees and other family members is determined by an actuarial formula based on participants’ length of service and salary. In a defined-contribution scheme, the level of contributions to the fund is set, but the benefits that will be payable depend on the assets of the fund.

7.192 A pension fund for public sector employees can be managed on behalf of the public sector unit by a public or private insurance corporation, or it can be organized and managed by the public sector unit as an autonomous or nonautonomous pension fund. A nonautonomous pension fund is not a separate unit and the assets of the fund belong to the employer. The employees have a claim against the employer who operates the nonautonomous fund, and the employer has a liability equal to the present value of the promised benefits. For a description of the typology of social protection arrangements, see Appendix 2.

7.193 The liabilities of unfunded pension schemes should also be included in pension entitlements. By its nature, an unfunded employment-related pension scheme must be organized and managed by the employer, which may be a general government unit or a public corporation.

7.194 No liability is recognized in the primary accounts of macroeconomic statistical systems for benefits under social security schemes.57 The implicit obligation for future social security benefits are reported as a memorandum item to the balance sheet (see paragraph 7.261), regardless of the level of assets in a social security fund or other segregated accounts. Liabilities for the payment of social security benefits that were due to be paid but have not yet been paid are classified as other accounts receivable/payable (6308, 6318, 6328). If a social security fund also administers an employment-related pension scheme, those pension obligations are included under pension entitlements, and not as implicit social security obligations.

7.195 As well as pensions, some employment-related schemes may have other related liabilities, such as for health benefits, which are included under entitlements to nonpension benefits.58 Liabilities for these nonpension entitlements are recorded in macroeconomic statistics only when and to the extent that they exist in the employer’s accounts—that is, when reserves for these nonpension entitlements actually exist. For pragmatic reasons, such liabilities for nonpension entitlements may be included with those for pension entitlements.

7.196 In addition to its pension entitlement liabilities to its beneficiaries, a pension fund may sometimes have a claim on the employer, as the pension manager of the scheme. On the other hand, the pension manager may have a claim on the surplus of the pension fund. Such claims are excluded from pension entitlements and are classified as claims of pension funds on pension manager (62064, 62164, 62264, 63064, 63164, 63264) (see paragraphs 7.199–7.200).

7.197 Pension entitlements are valued as follows:

  • The liability of a defined-benefit pension scheme (including nonautonomous pension funds and unfunded pension schemes) is the present value of the promised benefits.

  • The liability of a defined-contribution pension fund is the current market value of the fund’s net assets, which is determined according to the performance of the assets acquired with the pension contributions.59

7.198 Because the measurement of defined-benefit pension fund entitlements rests on various assumptions and methods, the nature of coverage and estimation should be described in metadata accompanying the balance sheet and other data reports.

Claims of pension funds on pension manager (62064, 62164, 62264, 63064, 63164, 63264)

7.199 An employer may contract with a third party to administer a pension fund for its employees. If the employer continues to determine the terms of the pension scheme and retains the responsibility for funding any deficit, as well as the right to retain any excess funding, the employer is referred to as the pension manager and the unit working under the direction of the pension manager as the pension administrator. If the agreement between the employer and the administrator is such that the employer passes the risks and responsibilities for any deficit in funding to the administrator in return for the right of the administrator to retain any excess, the latter becomes the pension manager as well as the administrator.

7.200 When the pension manager is a unit different from the administrator, and the responsibility for any deficits, or claims on any excess, rests with the pension manager, the following are recorded in the balance sheet of the pension manager:

  • A liability for claims of pension funds on the pension manager, in the case of deficits

  • A financial asset in the form of a claim on the pension fund, if the pension fund generates more investment income from the assets it holds than is necessary to cover the increase in pension entitlements

  • A counterpart entry should be recorded in imputed employer’s social contributions on a net basis (i.e., an expense to increase the liability and a reduction in the expense when the liability reduce or when government acquires an asset).

Provisions for calls under standardized guarantee schemes (62065, 62165, 62265, 63065, 63165, 63265)

7.201 Standardized guarantees are those kinds of guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines.60 Operators of standardized guarantee schemes incur liabilities equal to the present value of the expected calls under outstanding guarantees, net of any recoveries the guarantor expects to receive from the defaulting borrowers, a similar approach as for nonlife insurance. This liability is called provisions for calls under standardized guarantees.

7.202 There are three parties involved in these arrangements: the borrower (debtor), the lender (creditor), and the guarantor. Either the borrower or lender may contract with the guarantor to repay the lender if the borrower defaults. Examples are export credit guarantees, deposit guarantees, and student loan guarantees. Standardized guarantees are based on the same paradigm as that for nonlife insurance, and a similar treatment is adopted for these guarantees, as discussed in paragraphs A4.66–A4.80.

Financial derivatives and employee stock options (6207, 6217, 6227, 6307, 6317, 6327)

7.203 Financial derivatives and employee stock options are financial assets and liabilities that have similar features, such as a strike price and some of the same risk elements. However, although both transfer risk, employee stock options are also designed to be a form of remuneration.

Financial derivatives (62071, 62171, 62271, 63071, 63171, 63271)

7.204 A financial derivative contract is a financial instrument that is linked to another specific financial instrument, indicator, or commodity and through which specific financial risks (e.g., interest rate risk, foreign exchange risk, equity and commodity price risks, and credit risk) can be traded in their own right in financial markets. Transactions and positions in financial derivatives are treated separately from the values of any underlying items to which they are linked. Financial derivatives are valued at market prices prevailing on balance sheet recording dates. If market price data are unavailable, other fair value methods (e.g., option models or present values) may be used to value them. Compilers are generally constrained to use the parties’ own accounts.

7.205 The risk embodied in a financial derivative contract can be traded either by selling the contract itself, as is possible with options, or by creating a new contract embodying risk characteristics that match, in a countervailing manner, those of the existing contract. The latter practice, which is termed offsetability, occurs in forward markets. Offsetability means that it is often possible to eliminate the risk associated with a derivative by creating a new but reverse contract having characteristics that countervail the risk underlying the first derivative. Buying the new derivative is the functional equivalent of selling the first derivative because the result is the elimination of the underlying financial risk. The ability to countervail the underlying risk in the market is therefore considered the equivalent of trad-ability in demonstrating value. The outlay that would be required to replace the existing derivative contract represents its value; actual offsetting is not required.

7.206 In many cases, derivatives contracts are settled by payments of net amounts in cash, rather than by the delivery of the underlying items. Once a financial derivative reaches its settlement date, any unpaid overdue amount is reclassified as other accounts receivable/payable, as its value is fixed, and thus the nature of the claim becomes debt.

7.207 The following types of financial arrangements are not financial derivatives:

  • A fixed-price contract for goods and services is not a financial derivative unless the contract is standardized so that the market risk therein can be traded in financial markets in its own right. For example, an option to purchase an aircraft from the manufacturer is not classified as a financial derivative; if the option to purchase is transferable, and is in fact transferred, the transaction is recorded under contracts, leases, and licenses, discussed in paragraph A4.52.

  • Insurance and standardized guarantees are not financial derivatives. Insurance involves the collection of funds from policyholders to meet future claims arising from the occurrence of events specified in insurance policies. That is, insurance and standardized guarantees are used to manage event risk primarily by the pooling, not the trading, of risk (see paragraph 7.201). However, some guarantees other than standardized guarantees meet the definition of financial derivatives. Those guarantees protect, on a guarantee-by-guarantee basis, the lender against certain types of risk arising from a credit relationship by paying the guarantor a fee for a specified period—these are known as credit derivatives (see paragraph 7.218).

  • Contingent assets and liabilities, such as one-off guarantees and letters of credit, are not financial assets (as discussed in paragraph 7.251).

  • Instruments with embedded derivatives are not financial derivatives (see paragraph 7.148). If the owner of the primary instrument subsequently creates a new but reverse financial derivative contract to offset the risk of the embedded derivative, the creation of this new financial derivative contract is recorded as a separate transaction, which does not affect the recording of transactions and positions in the primary instrument. However, detachable warrants are treated as separate financial derivatives, because they can be detached and sold in financial markets.

  • Timing delays that arise in the normal course of business and may entail exposure to price movements do not give rise to financial derivatives. Timing delays include normal settlement periods for spot transactions in financial markets.

7.208 There are two broad types of financial derivatives—options and forward-type contracts.

Options

7.209 In an option contract (option), the purchaser acquires from the seller a right to buy or sell (depending on whether the option is a call (buy) or a put (sell)) a specified underlying item at a strike price on or before a specified date. The purchaser of an option pays a premium to the writer of the option. In return, the buyer acquires the right but not the obligation to buy (call option) or sell (put option) a specified underlying item (real or financial) at an agreed-on contract price (the strike price) on or before a specified date. (On a derivatives exchange, the exchange itself may act as the counterparty to each contract.)

7.210 Options can be contrasted with forward-type contracts in that:

  • At inception, there is usually no up-front payment for a forward-type contract and the derivative contract begins with zero value, whereas there is usually a premium paid for an option that reflects the nonzero value of the contract.

  • During the life of the contract, for a forward-type contract, either party can be creditor or debtor, and it may change, whereas for an option, the buyer is always the creditor and the writer is always the debtor.

  • At maturity, redemption is unconditional for a forward-type contract, whereas for an option it is determined by the buyer of the option.

7.211 Warrants are a form of financial derivative option giving the owner the right but not the obligation to purchase from the issuer of the warrant a fixed amount of an underlying asset, such as equities and bonds, at an agreed contract price for a specified period of time or on a specified date. Although similar to other traded options, a distinguishing factor is that the exercise of the warrants can create new securities, thus diluting the capital of existing bond- or shareholders, whereas traded options typically grant rights over assets that are already available.

Forward-type contracts

7.212 A forward-type contract (forward) is an unconditional contract by which two counterparties agree to exchange a specified quantity of an underlying item (real or financial) at an agreed-on contract price (the strike price) on a specified date. Forward-type contracts include futures and swaps (other than as discussed in paragraph 7.215). The term forward-type contract is used because the term forward is often used more narrowly in financial markets (often excluding swaps).

7.213 Futures are forward-type contracts traded on organized exchanges. The exchange facilitates trading by determining the standardized terms and conditions of the contract, acting as the counterparty to all trades, and requiring a margin to be deposited and paid to mitigate risk. Forward rate agreements and forward foreign exchange contracts are common types of forward-type contracts.

7.214 At the inception of a forward-type contract, risk exposures of equal market value are exchanged, so a contract typically has zero value at that time. As the price of the underlying item changes, the market value will change, although it may be restored to zero by periodic settlement during the life of the forward. The classification of a forward-type contract may change between asset and liability positions.

Other issues associated with financial derivatives

Swap contracts

7.215 A swap contract involves the counterparties exchanging, in accordance with prearranged terms, cash flows based on the reference prices of the underlying items. Swap contracts classified as forward-type contracts include currency swaps, interest rate swaps, and cross-currency interest rate swaps. Under a swap contract, the obligations of each party may arise at different times—for example, an interest rate swap for which payments are quarterly for one party and annual for the other. In such cases, the quarterly amounts payable by one party prior to payment of the annual amount payable by the other party are recorded as transactions in the financial derivative contract. Other types of arrangements also called swaps but not meeting the foregoing definition include gold swaps (see paragraph 7.161 for a discussion of their treatment), central bank swap arrangements,61 and credit default swaps (see paragraph 7.218).

7.216 For foreign currency financial derivative swap contracts, such as currency swaps, it is necessary to distinguish between transactions in a financial derivative contract and transactions in the underlying currencies. At inception, the parties exchange the underlying financial instruments (usually classified as currency and deposits or loans). At the time of settlement, the difference in the values of the currencies swapped, as measured in the unit of account at the prevailing exchange rate, is allocated to a transaction in a financial derivative, with the values swapped recorded in the relevant item (usually currency and deposits, or loans).

7.217 As mentioned in paragraph 7.162, the economic nature of an off-market swap is equivalent to a combination of borrowing (i.e., the lump sum), in the form of a loan, and an on-market swap (financial derivative).

Credit derivatives

7.218 Credit derivatives are financial derivatives whose primary purpose is to trade credit risk. They are designed for trading in loan and security default risk. In contrast, the financial derivatives described in paragraphs 7.215–7.217 are mainly related to market risk, which pertains to changes in the market prices of securities, commodities, interest, and exchange rates. Credit derivatives take the form of both forward-type (total return swaps) and option-type contracts (credit default swaps). Under a credit default swap, premiums are paid in return for a cash payment in the event of a default by the debtor of the underlying instrument. Like other financial derivatives, credit derivatives are frequently drawn up under standard master legal agreements and involve collateral and margining procedures, which allow for a means to make a market valuation.

Margins

7.219 Financial derivatives are often subject to margin calls. Margins are payments of cash or deposits of collateral that cover actual or potential obligations incurred. The required provision of margin reflects market concern over counterparty risk, especially in markets for futures and exchange-traded options. The classification of margins depends on whether they are repayable or nonrepayable:

  • Repayable margin consists of cash or other collateral deposited to protect counterparties against default risk. Ownership of the margin remains with the unit that deposited it. Repayable margin payments in cash are classified as transactions and stock positions in deposits (particularly if the debtor’s liabilities are included in broad money) or in other accounts receivable/payable. When a repayable margin deposit is made in an asset other than cash (such as securities), no transaction nor change in stock position is recorded because no change in economic ownership has occurred.

  • Nonrepayable margin payments reduce the financial liability position in a derivative. In organized exchanges, nonrepayable margin (sometimes known as variation margin) is paid daily to meet liabilities recorded as a consequence of the daily marking of derivatives to market value. The entity that pays nonrepayable margin no longer retains ownership of the margin nor has the right to the risks and rewards of ownership. Nonrepayable margin payments are classified as transactions in financial derivatives.

7.220 These principles for the classification of margins also apply more generally to margin calls relating to positions in other financial assets.

Employee stock options (62072, 62172, 62272, 63072, 63172, 63272)

7.221 Employee stock options are options to buy the equity of a company, offered to employees of the company as a form of remuneration. Employee stock options have similar pricing behavior to financial derivatives, but they have a different nature—including arrangements for the granting and vesting dates—and purpose (i.e., to motivate employees to contribute to increasing the value of the company, rather than to trade risk). If a stock option granted to employees can be traded on financial markets without restriction, it is classified as a financial derivative.

7.222 In some cases, stock options may be provided to suppliers of goods and services to the enterprise. Although these are not employees of the enterprise, for convenience they are also recorded under employee stock options because their nature and motivation is similar. (Whereas the corresponding entry for stock options granted to employees is wages and salaries in kind (2112) as discussed in paragraph 6.17, the corresponding entry for stock options granted to suppliers is use of goods and services (22).)

7.223 Employee stock options should be valued at fair value at grant date62 using a market value of equivalent traded options (if available) or using an option pricing model (binomial or Black-Scholes) with suitable allowance for particular features of the options.63 After the vesting date, employee stock options are valued at market prices.

Other accounts receivable/payable (6208, 6218, 6228, 6308, 6318, 6328)

7.224 Other accounts receivable/payable consist of trade credit and advances and miscellaneous other items due to be paid or received. If an economic event requires a subsequent cash flow, for example, goods and services are sold on credit provided by the supplier and the length of time between the economic event and the time of the cash flow is bridged by an entry in other accounts receivable/payable.

7.225Trade credit and advances (62081, 62181, 62281, 63081, 63181, 63281) include (i) trade credit extended directly to purchasers of goods and services and (ii) advances for work that is in progress or to be undertaken, such as progress payments made during construction in advance for work being performed, or for prepayments of goods and services. Such credit arises both from normal delays in receiving payment and from deliberate extensions of vendor credit to finance sales. Trade credit extended by the seller of goods and services does not include loans, debt securities, or other liabilities that are provided by third parties to finance trade. If a government unit issues a promissory note or another type of security to consolidate the payment due on several trade credits, the note or security should be classified as a debt security. Trade credit and advances exclude trade credits that meet the definition of a loan.64

7.226Miscellaneous other accounts receivable/payable (62082, 62182, 62282, 63082, 63182, 63282) include accrued but unpaid taxes, dividends, payment for purchases and sales of securities paid or received before the instrument is issued, rent, wages and salaries, social contributions, social benefits, and similar items. They also include payments due under financial derivative contracts that are in arrears and payments of amounts that have not yet accrued, such as prepayments of taxes. Some of these prepayments, often called “deposits,” should be recorded here rather than in currency and deposits. These “deposits” are repayable only when specific conditions are met. Examples of this type of “deposit” included under miscellaneous other accounts receivable/payable are deposits held by court or tax authorities pending resolution of a dispute, deposits payable in advance to cover breakages or nonpayment for the use of goods and services, and bail deposits. In principle, accrued but unpaid interest should be added to the principal of the underlying asset rather than included in this category. Taxes receivable and/or compensation of employees payable should be separately identified if the amounts are substantial.

7.227 Other accounts receivable/payable should be recorded at nominal value. By definition, other accounts receivable/payable are accrual concepts and do not exist in an accounting system that uses a pure cash basis of recording.

Net Worth

7.228 As defined in paragraph 7.1, net worth (6) of an institutional unit (or grouping of units) is the total value of its assets minus the total value of its liabilities. Net worth is a balancing item that stems from valuing assets and liabilities (including equity and investment fund shares) at their market prices on the balance sheet date. Net worth can be positive, negative, or zero. As with other balancing items in GFS, net worth cannot be measured independently of the other entries.

7.229 For most government units, the net worth is the economic value of the unit because they usually have no issued shares and other equity. In the case of quasi-corporations, net worth is zero, because the value of the owners’ equity is assumed to be equal to its assets minus its liabilities. Even when general government units have liabilities in the form of equity (see paragraph 7.170), the net worth of such government units is zero, similar to that of quasi-corporations, if these shares are not traded or the value of the shares cannot be determined independently. For other corporations, net worth is a component of own funds. In macroeconomic statistics, own funds and net worth have a specific meaning, which may differ from the understanding of these terms within the context of accounting.

7.230 When an autonomous pension fund operates as a defined contribution scheme, the net worth will be zero, because by definition the claims on the pension fund are equal to the assets of the fund. However, a defined-benefit pension scheme operated by an insurance corporation or as an autonomous pension fund can have a net worth, positive or negative, if the assets of the fund exceed or fall short of the fund’s liability for the pension benefits, unless there is a claim of the pension fund on the pension manager—in which instance the net worth is also zero (see paragraphs 7.199–7.200).

7.231 Own funds are defined as the difference between total assets (at market values) and total liabilities excluding shares and other equity (at market value). From the foregoing, it follows that the value of own funds is equal to the value of shares and other equity (at current market prices on the balance sheet date) plus net worth, as illustrated in Figure 7.1.

Figure 7.1Net Worth in a Macroeconomic Statistics Balance Sheet

7.232 In the case of quasi-corporations, their imputed shareholders’ equity is equal to their own funds. Public corporations are seen to have a net worth (which could be positive or negative) in addition to the value of the shareholders’ equity, if shares are traded in the market or the value can be determined independently. This is because shares are included in the public corporation’s balance sheet at their current market price on the balance sheet date.

7.233 If the current market value of equity and investment fund shares cannot be determined independently or they do not trade in the market, an alternative calculation is similar to the treatment of quasi-corporations (see paragraph 7.232). This calculates the value of equity and investment fund shares in such a way that the net worth of the public corporation is zero.

Memorandum Items

7.234 It may be desirable to record memorandum items to provide supplemental information about items (such as aggregates and balancing items) related to, but not included on, the balance sheet. Table 7.10 shows the memorandum items to the balance sheet proposed in the GFS framework (additional items and subitems may be added, as needed).

Table 7.10Classification of Memorandum Items to the Balance Sheet
6M2Net financial worth
6M3Gross debt at market value
6M4Gross debt at nominal value
6M35Gross debt at face value
6M36Net debt at market value
6M37Net debt at nominal value
6M38Net debt at face value
6M391Concessional loans at nominal value
6M392Implicit transfers resulting from loans at

concessional interest rates
6M5Arrears
6M6Explicit contingent liabilities1
6M61Publicly guaranteed debt
6M62Other one-off guarantees
6M63Explicit contingent liabilities not

elsewhere classified
6M7Net implicit obligations for future social security

benefits1
6M8Nonperforming loan assets at fair value
6M81Nonperforming loan assets at nominal value

The contingent liabilities are shown in the Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits (Table 4.6).

The contingent liabilities are shown in the Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits (Table 4.6).

Net Financial Worth (6M2)

7.235 The net financial worth (6M2) of an institutional unit (or grouping of units) is the total value of its financial assets minus the total value of its liabilities. This balancing item is often cited because of the general government and public sectors’ influence on the financial system and also because of the difficulties in valuing government-unique nonfinancial assets.

Debt65

Gross debt

7.236 Total gross debt—often referred to as “total debt” or “total debt liabilities”—consists of all liabilities that are debt instruments. A debt instrument is defined as a financial claim that requires payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates, in the future. The following instruments are debt instruments:

  • Special Drawing Rights (SDRs)

  • Currency and deposits

  • Debt securities

  • Loans

  • Insurance, pension, and standardized guarantee schemes [GFS]

  • Other accounts payable.

7.237 From the foregoing list, it follows that all liabilities included in the GFS balance sheet are considered debt, except for liabilities in the form of equity and investment fund shares and financial derivatives and employee stock options. Equity and investment fund shares are not debt instruments because they entitle the holders to dividends and a claim on the residual value of the unit. Financial derivatives are not debt instruments because they do not supply funds or other resources, but rather shift the exposure to risks from one party to another.

7.238 As recommended in the PSDS Guide, debt instruments should be valued on the reference date at nominal value, and, for traded debt securities, at market value as well. Both valuation bases provide useful information about debt. If the nominal and market values of debt instruments are not available, gross debt is at face value. Deviations from these valuation principles should always be specified in the footnotes to the balance sheet.

7.239 These valuations of gross debt are discussed, in turn, in paragraphs 7.240–7.242. For more details on valuation, see paragraphs 3.107–3.129.

Gross debt at market value (6M3)

7.240Gross debt at market value (6M3) means that debt securities are valued at market prices; insurance, pension, and standardized guarantee schemes are valued according to principles that are equivalent to market valuation; and all other debt instruments are valued at nominal prices, which are considered to be the best generally available proxies of their market prices.

Gross debt at nominal value (6M4)

7.241Gross debt at nominal value means that debt securities are valued at their nominal values. The nominal value of a debt instrument at any moment in time is the amount that the debtor owes to the creditor. This is a measure of value from the viewpoint of the debtor.

Gross debt at face value (6M35)

7.242 The face value of a debt instrument is the undiscounted amount of principal to be repaid at (or before) maturity and has been called nominal value in some cases. The use of face value as a proxy for nominal value in measuring the gross debt position can result in an inconsistent approach across all instruments and is not recommended, unless nominal and market values are not available.

Net debt

7.243 Net debt is calculated as gross debt minus financial assets corresponding to debt instruments.66 Financial assets corresponding to debt instruments are:

  • Monetary gold and Special Drawing Rights (SDRs)

  • Currency and deposits

  • Debt securities

  • Loans

  • Insurance, pension, and standardized guarantee schemes [GFS]

  • Other accounts receivable.

7.244 Monetary gold, as defined in the 2008 SNA and this Manual, includes elements of a debt instrument (unallocated gold accounts) and a nondebt instrument (gold bullion). In principle, the gold bullion element of monetary gold should be excluded from the calculation of net debt. However, in practice, the total amount for monetary gold may have to be used in the net debt calculation because compilers of public sector debt statistics may not be able to exclude the gold bullion element.

7.245Net debt can be calculated at market value (6M36), nominal value (6M37), and face value (6M38).

Concessional loans

7.246 Loans with concessional interest rates could be seen as providing a benefit to the borrower in the form of a transfer equal to the difference between the actual interest payable and the amounts that would be payable if market-equivalent interest prevailed. If such a transfer were recognized, it would usually be recorded as current transfer/grant (depending on the type of recipient), and the interest recorded would be adjusted by the same amount. However, the means of incorporating the impact of concessional rates within macroeconomic statistics have not fully evolved, although various alternatives have been advanced.67 Accordingly, until the treatment is agreed, information on concessional debt should be provided through supplementary information in the form of two memorandum items. The first shows the stock of concessional loans at nominal value (6M391). The second shows an estimate of the value of the benefit transferred to the borrower—that is, the value of implicit transfers resulting from loans at concessional interest rates (6M392), calculated as described in footnote 67.

Arrears (6M5)

7.247 Arrears are defined as amounts that are both unpaid and past the due date for payment. In principle, amounts payable for any expense, acquisition of assets, or related to any liability may be in arrears.68 For debt liabilities, arrears arise when principal or interest payments are not made when due. For expense and the acquisition of nonfinancial assets, amounts payable may be in arrears from inception. For example, when amounts payable for compensation of employees are not made when due, the other accounts payable for compensation of employees are in arrears. Also, when a contract stipulates payment on delivery for goods and services or nonfinancial assets and such amounts payable are not settled on delivery, other accounts payable for these goods and services or nonfinancial assets are in arrears from inception.

7.248 When arrears in an existing liability occur, they should continue to be shown in the same instrument until the liability is extinguished. However, if the contract provides for a change in the characteristics of a financial instrument when it goes into arrears, this change should be recorded as a reclassification through other changes in the volume of assets and liabilities (see paragraphs 3.97, 9.21, and 10.84).

7.249 If under a cash accounting system, arrears are not recorded separately, compilers will need to collect supplementary information to estimate arrears. Information on arrears is useful for various kinds of policy analyses and solvency assessments and should be shown as a memorandum item in the balance sheet where significant. Information on arrears should continue to be collected from their creation—that is, when payments are not made—until they are extinguished, such as when debt arrears are repaid, rescheduled, or forgiven by the creditor, or when (say) wages and salaries in arrears are paid.

7.250 The nominal value of arrears is equal to the value of the payments—interest and principal in the case of liabilities—missed, and any subsequent economic flows, such as the accrual of additional interest on a liability in arrears, or the settlement of arrears. (See also paragraphs 9.22–9.23.)

Explicit Contingent Liabilities (6M6)

Overview

7.251 Contingent liabilities create fiscal risks69 and may arise from deliberate public policy or from unforeseen events, such as a financial crisis. Contingent liabilities are obligations that do not arise unless a particular, discrete event(s) occurs in the future. A key difference between contingent liabilities and liabilities70 is that one or more conditions must be fulfilled before a contingent liability is recognized as a liability. With contingent liabilities, there is typically uncertainty over whether a payment will be required, and its potential size.71

7.252 A distinction is made between explicit and implicit contingent liabilities. Explicit contingent liabilities are defined as legal or contractual financial arrangements that give rise to conditional requirements to make payments of economic value. The requirements become effective if one or more stipulated conditions arise. By contrast, implicit contingent liabilities do not arise from a legal or contractual source but are recognized after a condition or event is realized. While the focus of GFS (and other macroeconomic statistical systems) is largely on explicit contingent liabilities, implicit contingent liabilities, such as the net implicit obligations for future social security benefits (see paragraph 7.261), are important factors in fiscal risk and vulnerability analyses. Other examples of implicit contingent liabilities include ensuring the solvency of the banking sector, covering the obligations of subnational governments (state and local governments) or the central bank in the event of a default, assuming unguaranteed debt of public sector units, and potential spending for natural disaster relief.72

7.253Figure 7.2 provides an overview of liabilities and contingent liabilities in macroeconomic statistics. Explicit contingent liabilities can take a variety of forms, although guarantees are the most common. However, not all guarantees are contingent liabilities; as discussed earlier in this chapter, guarantees in the form of financial derivatives and provisions for calls under standardized guarantee schemes are liabilities on the balance sheet. On the other hand, one-off guarantees are contingent liabilities.

Figure 7.2Overview of Liabilities and Contingent Liabilities in Macroeconomic Statistics

1 Includes liabilities for nonautonomous unfunded employer pension schemes.

2 Excludes liabilities for nonautonomous unfunded employer pension schemes.

7.254 Explicit contingent liabilities comprise:

  • Publicly guaranteed debt (6M61), which is one-off guarantees in the form of loan and other debt instrument guarantees (see paragraphs 7.259–7.260)

  • Other one-off guarantees (6M62) for other than publicly guaranteed debt (see paragraphs 7.259–7.260)

  • Explicit contingent liabilities not elsewhere classified (6M63), which are explicit contingent liabilities that are not in the form of guarantees—for example:

    • Potential legal claims, which are claims stemming from pending court cases73

    • Indemnities, which are commitments to accept the risk of loss or damage another party might suffer (e.g., indemnities against unforeseen tax liabilities arising in government contracts with other units)

    • Uncalled capital, which is an obligation to provide additional capital, on demand, to an entity of which it is a shareholder (e.g., an international financial institution)

    • Potential payments resulting from PPP arrangements.

7.255 Information on the stock positions of one-off guarantees is relevant for public financial policy and analysis—particularly the stock position of publicly guaranteed debt. It is recommended that publicly guaranteed debt (6M61) should be shown, at nominal value, as a memorandum item to the balance sheet. If significant, information on other one-off guarantees (6M62) and explicit contingent liabilities not elsewhere classified (6M63) should also be included as a memorandum item to the balance sheet, at nominal value.74 One-off guarantees are discussed in paragraphs 7.256–7.260.

One-off guarantees

7.256 One-off guarantees comprise those types of guarantees where the debt instrument is so particular that it is not possible to calculate the degree of risk associated with the debt with any degree of accuracy. In contrast to standardized guarantees, one-off guarantees are individual, and guarantors are not able to make a reliable estimate of the risk of calls.

7.257 In most cases, a one-off guarantee is considered a contingent liability of the guarantor. Liabilities under one-off guarantees continue to be attributed to the debtor, not the guarantor, unless and until the guarantee is called.

7.258 In contrast, a one-off guarantee granted by government to a corporation in financial distress and with a very high likelihood to be called is treated as if the guarantee is called at inception.75 The activation of such a one-off guarantee is treated as debt assumption76 and this liability is part of the public sector unit’s balance sheet.

7.259 One-off guarantees may be grouped into loan and other debt instrument guarantees and other one-off guarantees:

  • Loan and other debt instrument guarantees—or one-off guarantees of payment—are commitments by one party to bear the risk of nonpayment by another party. Guarantors are required to make a payment only if the debtor defaults. Loans and other debt instrument guarantees constitute publicly guaranteed debt that is defined as debt liabilities of public and private sector units, the servicing of which is contractually guaranteed by public sector units.

  • Other one-off guarantees include credit guarantees (such as lines of credit and loan commitments), contingent credit availability guarantees, and contingent credit facilities. Lines of credit and loan commitments provide a guarantee that undrawn funds will be available in the future, but no financial liability/asset exists until such funds are actually provided. Undrawn lines of credit and undisbursed loan commitments are contingent liabilities of the issuing institutions—generally, banks. Letters of credit are promises to make payment upon the presentation of pre-specified documents. Underwritten note issuance facilities provide a guarantee that a borrower will be able to issue short-term notes and that the underwriting institution(s) will take up any unsold portion of the notes. Only when funds are advanced by the underwriting institution(s) will a liability/asset be created. The unutilized portion is a contingent liability. Other note guarantee facilities providing contingent credit or back-up purchase facilities are revolving underwriting facilities, multiple options facilities, and global note facilities. Bank and nonbank financial institutions provide back-up purchase facilities. Again, the unutilized amounts of these facilities are contingent liabilities.

7.260 Loan and other debt instrument guarantees (publicly guaranteed debt) differ from the other types of one-off guarantees. This is because the guarantor guarantees the servicing of an existing debt of other public and private sector units. With the other one-off guarantees, no financial liability/asset exists until funds are provided or advanced.

Net Implicit Obligations for Future Social Security Benefits (6M7)

7.261 As explained in paragraphs 7.194 and A2.39, no liability is recognized in macroeconomic statistical systems for social security benefits—such as retirement benefits (other than employment-related pensions) and health care benefits—payable in the future.77 These implicit obligations to pay social security benefits in the future are not contractual obligations and are therefore not recorded on the balance sheet (see paragraph 7.252). The present value of social security benefits that have already been earned according to the existing laws and regulations but are payable in the future should be calculated in a manner similar to the liabilities of an employment-related pension scheme. This amount minus the present value of social security scheme contributions provides an indication of the net implicit obligations that a government unit has for social security benefits payable in the future.

Nonperforming Loan Assets at Fair Value (6M8)

7.262 Nonperforming loans are those for which (i) payments of principal and/or interest are past due by three months (90 days) or more; or (ii) interest payments equal to three months (90 days) interest or more have been capitalized (reinvested to the principal amount) or payment has been delayed by agreement; or (iii) evidence exists to reclassify a loan as nonperforming even in the absence of a 90-day past due payment, such as when the debtor files for bankruptcy. The amount of nonperforming debt outstanding remains a legal liability of the debtor and interest should continue to accrue, unless the liability has been extinguished (e.g., by repayment or as a result of a bilateral arrangement between debtor and creditor).

7.263 As mentioned earlier in this chapter, loans are recorded at nominal value (i.e., the amount advanced plus interest accrued and not paid minus any repayments). It is recognized that nominal value provides an incomplete view of the financial position of the creditor, particularly when the loans are nonperforming. In such cases, information on the nominal value (6M81), as well as the fair value (6M8),78 of nonperforming loan assets should be included as a memorandum item to the balance sheet.

Classification of the Counterparty of Financial Assets and Liabilities by Institutional Sector

7.264 The preceding section discussed the classifications of financial assets and liabilities based on the characteristics of the instrument underlying the claim. For a fuller understanding of financial assets and liabilities of the general government or the public sector, the counterparties to these financial relationships should also be considered. For example, a classification of liabilities according to the economic sectors providing the financing (i.e., the sources of funding) complements the classification by type of financial instrument. Information on debtor-creditor relationships between sectors and subsectors is essential for proper consolidation of GFS. A classification of financial assets and liabilities according to whether the counterparty is a public or private nonfinancial or financial corporation, respectively, will be necessary to compile accurate consolidated general government or public sector balance sheets.

7.265 Two parties are associated with all financial claims. As a result, it is possible to cross-classify the financial instruments of financial claims with the sector of the counterparty, making a distinction between resident and nonresident units.79 This supplemental classification is presented in Table 7.11, which should be compiled separately for financial assets and liabilities.80

Table 7.11Cross-Classification of Financial Assets and Liabilities by the Institutional Sector of the Counterparty
Monetary

gold1 and

SDRs
Currency

and

deposits
Debt

securities
LoansEquity and

investment

fund shares
Insurance,

pension, and

standardized

guarantee

schemes [GFS]
Financial

derivatives

and

employee

stock options
Other

accounts

receivable/

payable


Financial assets:
Domestic debtors
General government2
Central bank
Deposit-taking

corporations except the

central bank
Public deposit-taking

corporations except the

central bank
Private deposit-taking

corporations except the

central bank
Other financial

corporations
Public other financial

corporations
Private other financial

corporations
Nonfinancial

corporations
Public nonfinancial

corporations
Private nonfinancial

corporations
Households and nonprofit

institutions serving

households
External debtors
General government
International

organizations
Financial corporations

other than international

organizations
Central banks
Financial corporations

not elsewhere classified
Other nonresidents
Liabilities:
Domestic creditors
Same institutional

breakdown as above
External creditors
Same institutional

breakdown as above

Gold bullion does not have a counterparty. By convention, in this table, the counterparty to the stock position in gold bullion is shown as other nonresidents.

Zero if data cover the consolidated general government. Further breakdown/of which lines could allow for the identification of subsectors and individual units (see Table 3.1).

Gold bullion does not have a counterparty. By convention, in this table, the counterparty to the stock position in gold bullion is shown as other nonresidents.

Zero if data cover the consolidated general government. Further breakdown/of which lines could allow for the identification of subsectors and individual units (see Table 3.1).

Classification of Debt Liabilities and Financial Assets Corresponding to Debt Instruments by Maturity

7.266 A supplementary classification of debt liabilities and financial assets corresponding to debt instruments by maturity and type of financial instrument provides information on the liquidity dimensions of debt. The maturity of a debt instrument refers to the time until the debt is extinguished according to the contract between the debtor and the creditor. A debt instrument’s maturity can be either short-term or long-term:

  • Short-term is defined as payable on demand or with a maturity of one year or less. This category includes arrears and interest on arrears.

  • Long-term is defined as having a maturity of more than one year or no stated maturity (other than debt repayable on demand, which is considered short-term).

7.267 Maturity may relate to:

  • Original maturity, which is the period from the issue date until the final contractually scheduled payment date, or

  • Remaining maturity or residual maturity, which is the period from the reference date (balance sheet date) until the final contractually scheduled payment date.

7.268 This Manual recommends a three-way classification (see Table 7.12) that allows for deriving debt statistics on both original and remaining maturity bases:

Table 7.12Classification of Debt Liabilities and Financial Assets Corresponding to Debt Instruments by Maturity and by Type of Debt Instrument
Long-term by original maturity
Short-

term, by

original

maturity1

(a)
With

payment

due in one

year or less

(b)
With payment

due in more

than one year =

Long-term

by remaining

maturity (c)
Total

(b) + (c)
Short-

term by

remaining

maturity

(a) + (b)
Financial assets corresponding to debt instruments62.162.262.362.462.5
Monetary gold and Special Drawing Rights (SDRs)6201.16201.26201.36201.46201.5
Currency and deposits6202.16202.26202.36202.46202.5
Debt securities6203.16203.26203.36203.46203.5
Loans6204.16204.26204.36204.46204.5
Insurance, pension, and standardized guarantee6206.16206.26206.36206.46206.5
schemes [GFS]
Nonlife insurance technical reserves62061.162061.262061.362061.462061.5
Life insurance and annuities entitlements62062.162062.262062.362062.462062.5
Pension entitlements [GFS]62063.162063.262063.362063.462063.5
Claims of pension funds on pension manager62064.162064.262064.362064.462064.5
Provisions for calls under standardized62065.162065.262065.362065.462065.5
guarantee schemes
Other accounts receivable6208.16208.26208.36208.46208.5
Trade credit and advances62081.162081.262081.362081.462081.5
Miscellaneous other accounts receivable62082.162082.262082.362082.462082.5
Domestic621.1621.2621.3621.4621.5
Same instrument breakdown as above, but6212.1–6212.2–6212.3–6212.4–6212.5–
excluding monetary gold and SDRs6218.16218.26218.36218.46218.5
External622.1622.2622.3622.4622.5
Same instrument breakdown as above6221.1–

6228.1
6221.2–

6228.2
6221.3–

6228.3
6221.4–

6228.4
6221.5–

6228.5
Debt instruments (= gross debt)63.163.263.363.463.5
Special Drawing Rights (SDRs)6301.16301.26301.36301.46301.5
Currency and deposits6302.16302.26302.36302.46302.5
Debt securities6303.16303.26303.36303.46303.5
Loans6304.16304.26304.36304.46304.5
Insurance, pension, and standardized guarantee6306.16306.26306.36306.46306.5
schemes [GFS]
Nonlife insurance technical reserves63061.163061.263061.363061.463061.5
Life insurance and annuities entitlements63062.163062.263062.363062.463062.5
Pension entitlements [GFS]63063.163063.263063.363063.463063.5
Claims of pension funds on pension manager63064.163064.263064.363064.463064.5
Provisions for calls under standardized63065.163065.263065.363065.463065.5
guarantee schemes
Other accounts payable6308.16308.26308.36308.46308.5
Trade credit and advances63081.163081.263081.363081.463081.5
Miscellaneous other accounts payable63082.163082.263082.363082.463082.5
Domestic631.1631.2631.3631.4631.5
Same instrument breakdown as above, but6312.1–6312.2–6312.3–6312.4–6312.5–
excluding SDRs6318.16318.26318.36318.46318.5
External632.1632.2632.3632.4632.5
Same instrument breakdown as above6321.1–

6328.1
6321.2–

6328.2
6321.3–

6328.3
6321.4–

6328.4
6321.5–

6328.5

This category includes arrears and interest on arrears.

This category includes arrears and interest on arrears.

  • Short-term debt on an original maturity basis

  • Long-term debt due for payment within one year or less

  • Long-term debt due for payment in more than one year.

7.269 To derive short-term debt on a remaining maturity basis, the second bullet above can be combined with the first bullet above. To derive long-term debt on an original maturity basis, the second bullet above can be combined with the third bullet above. Other aggregates on an original or a remaining maturity basis can be derived directly from Table 7.12. The classification codes in Table 7.12 correspond to those in Table 7.9; only a suffix has been added to indicate the type of maturity.

7.270 Measuring the value of outstanding long-term public sector debt (original maturity) falling due in one year or less may raise practical difficulties, in which instance, one proxy measure that may be used is the undiscounted value of principal payments on long-term public sector debt liabilities (original maturity basis) due to mature in one year or less. This proxy measure is incomplete in its coverage of interest payments falling due in the coming year but can be compiled using the principles for projecting payments in a debt-service schedule.

7.271 Statistics on a remaining maturity basis permit an assessment of liquidity risk by indicating when public sector debt payments will fall due. Information on payments becoming due in the short- to near-term is particularly relevant for this analysis. Statistics on a remaining maturity basis are also used for debt management purposes. Statistics on an original maturity basis provide an indication of the borrower’s credit-worthiness and the type of markets in which it is borrowing.

A balance sheet can be compiled for an individual unit or any collection of units, such as the general government or public sector, or their subsectors. It is often convenient to describe a balance sheet in reference to a single institutional unit, but any such statement applies equally to the balance sheet of a sector or subsector.

Table 4.4 shows a presentation of a balance sheet that displays the same information presented in an alternative format.

Exclusive economic zones are the area of sea and seabed extending from the shore of a country claiming exclusive rights to them.

An example is an agreement to perform cleanup (i.e., removal, containment, and disposal) of hazardous waste that resulted from government operations. Where terminal costs are part of costs of ownership transfer, these costs are written off through consumption of fixed capital over the whole life of the asset. Terminal costs are discussed in paragraphs 6.60 and 8.6.

These liabilities could include those arising from taxes, penalties (including penalties arising from commercial contracts), and judicial awards at the time they are imposed.

These include claims on nonlife insurance companies, claims for damages not involving nonlife insurance companies, and claims arising from lottery and gambling activity.

Government units typically do not fulfill functions of monetary authorities and thus would not hold financial assets in the form of gold bullion.

Accumulated revaluations arising from market price changes reconcile nominal value with market value.

Nominal and market valuation are discussed in paragraphs 3.113–3.117. For a numerical examples on the calculation of interest and nominal value, see Boxes 2.3–2.5 in the PSDS Guide.

Amounts previously recorded as expense are based on the average prices of the asset over the reporting period.

See the PSDS Guide, Chapter 2.

See Box 6.1 for guidance on the calculation of consumption of fixed capital.

See paragraph 10.52.

For details on the PIM, see Organisation for Economic and Cooperation and Development, Measuring Capital—OECD Manual: Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services (Paris, 2009).

Present value is the value today of a future payment or stream of payments discounted at some appropriate compounded interest rate. It is also referred to as the “time value of money” or “discounted cash flow.”

The numbers in parentheses after each classification category are the GFS classification codes. Appendix 8 provides all classification codes used in GFS.

The classification of assets and liabilities in this chapter is supplemented by description of transactions in Chapters 8 and 9, while other economic flows related to these assets and liabilities are described in Chapter 10.

All items under the United Nations’ Central Product Classification (CPC), version 2.0, categories 43–48, are included here, except for categories 452 and 472, which are classified under Information, Computer, and Telecommunications (ICT) Equipment. For more details, see http://unstats.un.org/unsd/cr/registry/cpc-2.asp.

For further guidance on the practical measurement of research and development, see Organisation for Economic and Co-operation and Development, Handbook on Deriving Capital Measures of Intellectual Property Products (Paris, 2010).

The patent agreement is to be seen as the legal agreement concerning the terms on which access by third parties to research and development is granted. The patent agreement is a form of license to use, which is treated as payments for service or the acquisition of assets. See discussions on contracts, leases, and licenses (61441) in paragraph 7.105 and in Appendix 4.

For example, it may be sold under exceptional circumstances, such as the liquidation of a public sector unit.

See paragraphs 3.38–3.41 and 7.5, for a description of the distinction between legal and economic ownership.

See Appendix 4, Box A4.1, for a description of the criteria to distinguish between rent and asset sales of natural resources.

Also see 2008 SNA, Chapter 17, part 5.

For a description of the recording of these permits issued by government see paragraphs A4.18–A4.52.

As explained in paragraph 10.55, the amortization of goodwill and marketing assets over their service or legal lives is an other economic flow.

A discussion of Islamic banking instruments and how they can be treated in terms of the classification of financial assets and liabilities can be found in the MFSM, Appendix 2.

That value, however, may differ from an asset’s nominal value, which is a measure of value from the viewpoint of the debtor: at any moment in time the nominal value is the amount that the debtor owes to the creditor. See paragraph 3.115.

All liabilities except equity and investment fund shares, and financial derivatives and employee stock options are debt instruments.

This is often referred to as “public policy lending” or “policy lending” and is treated akin to expenditure in the calculation of the overall balance.

As explained in Box 6.3, under some circumstances, “capital or equity injections” are considered to be expense—that is, they do not result in a financial claim on the debtor.

There is no liability in the form of monetary gold; the counterpart liability to monetary gold in the form of unallocated gold accounts with nonresidents that give title to claim the delivery of gold is classified under deposits. Gold bullion has no counterparty liability.

See the BPM6, paragraphs 5.74–5.78, for a detailed discussion of gold bullion and gold accounts.

For example, gold held by a commercial bank but under the control of the monetary authorities.

Nonmonetary gold is a good and classified under nonfinancial assets as valuables, if held primarily as a store of value, and classified as inventories of materials and supplies, if used in a production process (such as jewelry or dentistry).

The IMF has also designated a limited number of international financial institutions as holders of SDRs.

Appendix 1 of the EDS Guide provides a glossary of financial instruments, including banker’s acceptances.

For a discussion of the accrual recording of interest on zero-coupon and deep-discounted bonds, see paragraphs 6.71–6.72 and the annex to Chapter 2 of the PSDS Guide.

An embedded derivative arises when a derivative feature is inserted in a standard financial instrument and is inseparable from the instrument.

An example is a syndicated loan, which is provided by a group of lenders and is structured, arranged, and administered by one or several commercial or investment banks. If parts of a syndicated loan become traded in secondary markets, the loan may meet the criteria to be reclassified as a security.

A loan is distinguished from a deposit on the basis of the representation in the documents that evidence them.

An open maturity exists when both parties have the option to agree daily to renew or terminate the agreement.

Repurchase agreements that are included in the national definition of broad money should be classified as nontransferable deposits. All other securities repurchase agreements should be classified under loans.

A swap contract involves the counterparties exchanging, in accordance with prearranged terms, cash flows based on the reference prices of the underlying items.

For more details, see the PSDS Guide, paragraphs 4.127–4.131.

See the BPM6, paragraph A3.44.

Incorporated corporations have a limited liability toward their shareholders so that the minimum value of their equity is zero.

These are discussed further in the BPM6, paragraphs 4.73–4.75.

It is unlikely that a general government unit would incur liabilities with respect to life insurance and annuities, unless it provides such schemes to its employees.

These issues are discussed in detail in the 2008 SNA, paragraphs 17.76–17.224.

Nonlife insurance covers all risks other than life insurance, such as accidents, sickness, fire, etc. A policy that provides a benefit in the case of death within a given period but in no other circumstances, usually called term insurance, is regarded as nonlife insurance because, as with other nonlife insurance, a claim is payable only if a specified contingency occurs and not otherwise. In practice, because of the way in which insurance corporations keep their accounts, it may not always be possible to separate term insurance from other life insurance. In these circumstances, term insurance may have to be treated in the same way as life insurance for practical reasons.

This is distinct from term insurance, which is regarded as non-life insurance (see footnote 51).

In the commercial accounts of insurance corporations, some of these obligations will be described as provisions for bonuses and rebates. This is the result of the insurance industry’s practice of smoothing benefits over time and retaining some benefits until the policy matures.

[GFS] indicates that an item has the same name but different coverage in the 2008 SNA.

Existing and future pensioners include past and current employees, as well as existing pensioners, but exclude future employees.

Defined-benefit schemes are sometimes referred to as “final salary schemes,” while defined-contribution schemes are sometimes referred to as “money-purchase schemes.”

Social security schemes are defined in paragraphs 2.100–2.102.

Funded schemes for social insurance other than pensions are not common.

The basis on which pension entitlement is calculated is described in detail in the 2008 SNA, Chapter 17.

In contrast, one-off guarantees are individual, and guarantors usually cannot reliably estimate the risk of calls. As a result, in most cases, one-off guarantees are considered a contingent liability (unless and until such guarantees are called). For a discussion of contingent liabilities, see paragraphs 7.251–7.260.

See the BPM6, paragraphs 6.102–6.104.

The terms grant date, vesting date, and exercise date are defined in paragraph 9.77.

The International Accounting Standards Board provides detailed recommendations on how employee stock options may be valued, and its recommendations are likely to be followed by corporations using employee stock options as a form of compensation for their employees. The value of the employee stock options varies between grant date and vesting date and then between the vesting date and exercise date, as the value of the shares covered changes.

A supplier of goods or services may have a claim on a government unit in the form of a trade credit. When the supplier transfers this claim completely and irrevocably to a financial institution (notably a unit engaged in factoring activity), the original liability of the government unit recorded as trade credit in other accounts payable should be reclassified (by way of other changes in the volume of assets) as a loan when the following two conditions are both met: (i) the government unit has no longer any payment obligation to its supplier, and (ii) the financial institution has no direct or indirect recourse on the supplier (transferor of the claim) if the government unit does not meet its payment obligations in due time. Also, if a trade credit is restructured in such a way that it meets the definition of a loan, it should be reclassified as a loan.

For a detailed discussion on the compilation of public sector debt, see the PSDS Guide.

This category calculates net debt as total debt liabilities minus all financial assets corresponding to debt instruments. For some purposes, it may be useful to net individual debt instruments against their corresponding financial assets. For other purposes, it may be useful to calculate debt net of highly liquid assets. However, in most cases, a one-on-one netting of a debt instrument against its corresponding financial asset may not be analytically useful because, typically, specific types of assets are not earmarked to repay specific types of liabilities. Debt net of highly liquid assets is, in most cases, equal to gross debt minus financial assets in the form of currency and deposits. However, in some cases, debt securities held for debt management purposes could be included as highly liquid financial assets.

The one-off benefit at the point of loan origination can be calculated as being equal to the difference between the nominal value of the debt and its present value using a relevant market discount rate. This option has the advantage of considering all the possible sources of transfers in debt concessionality—maturity period, grace period, and frequency of payments, as well as the interest rate—and is consistent with nominal valuation of loans. Such an approach should be used for official lending involving an intention to convey a benefit and occurrence in a noncommercial setting (usually government-to-government). For example, in debt reorganization through the Paris Club, debt reduction in present value terms is calculated using a market-based discount rate, usually the OECD’s Commercial Interest Reference Rate (CIRR). The difference between the nominal value of the applicable debt and its present value is the amount of capital transfer derived from the debt reorganization arrangements. For more details, see the PSDS Guide, paragraphs 4.83–4.86. For the treatment of concessional loans to employees, see paragraph 6.17.

In some cases, arrears arise for operational reasons (such as minor administrative delays) rather than from a reluctance or inability to pay. Nonetheless, in principle, such arrears should be recorded as arrears when outstanding at the reference date.

At the most general level, fiscal risks may be defined as any potential differences between actual and expected fiscal outcomes (e.g., fiscal balances and public sector debt). Contingent liabilities are a specific source of potential fiscal risk.

Liabilities refer to those obligations recognized on a macroeconomic statistics balance sheet in the calculation of an institutional unit’s net worth. Contingent liabilities are not included on the balance sheet (i.e., contingent liabilities are not taken into account in the calculation of a unit’s net worth).

Uncertainty about the potential size of liabilities does not make them contingent liabilities.

It is recommended in this Manual (and the PSDS Guide) to include as a separate memorandum item in the balance sheet the net obligations for future social security benefits—often the largest implicit contingency of government.

A pending legal case may also be a contingent asset—for example, a case in which the government has claimed damages against another party.

Limitations of this approach are that it offers no information on the likelihood of the contingency occurring and it may overstate the possible risk. For loan and other debt instrument guarantees, the maximum potential loss is likely to be less than their nominal value, because not all debts will default. There are several other approaches that address limitations to valuing explicit contingent liabilities; they are discussed in detail in Chapter 4 of the PSDS Guide and in Chapter 9 of the EDS Guide. The actual approach adopted will depend on the availability of information on the type of contingency. For this reason, it is particularly important to provide metadata on the method(s) used to value contingent liabilities.

Such treatment should be undertaken with caution, not least to avoid double-counting of the debt and inconsistencies with other macroeconomic statistics (which still record the claim to the original debtor). Eurostat uses the following practical guidance with regards to publicly guaranteed debt: if government, as a guarantor, makes a payment on an existing guaranteed debt in three consecutive years, and this situation is expected to continue, then the debt is considered to be assumed, normally in its entirety (or for the proportion government is expected to repay, if there is evidence of that).

Debt assumption is discussed in paragraphs A3.26–A3.31.

In contrast, social security benefits due for payment but not yet paid are included as other accounts payable in a public sector unit’s balance sheet. Also included in the balance sheet (and thus excluded from implicit contingent liabilities) are public sector units’ liabilities for unfunded nonautonomous pension schemes for their employees.

The concepts nominal value and fair value are described in paragraph 3.115.

Although gold bullion has no counterparty, by convention, the counterparty to the stock position in gold bullion is shown as “other nonresidents” in Table 7.11.

See Chapter 2 of this Manual, and the 2008 SNA, Chapter 4, for a description of sector classification. Issues in the identification of counterparties of traded debt securities are discussed in the PSDS Guide, Chapter 7.

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