Chapter

9. Transactions in Financial Assets and Liabilities

Author(s):
Sage De Clerck, and Tobias Wickens
Published Date:
March 2015
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This chapter describes transactions in financial assets and liabilities and their classification.

Introduction

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

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

  • The value of a category of financial assets (liabilities) on the balance sheet at the beginning of the reporting period

plus

  • The total value of that category of financial assets (liabilities) acquired (incurred) in transactions during the reporting period

minus

  • The total value of that category of financial assets (liabilities) disposed of (extinguished) in transactions during the reporting period

plus

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

equals

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

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

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

  • Transactions involving revenue, expense, the transfer of economic ownership of a good or nonfinancial asset, or the provision of a service or labor almost always entail a counterpart entry in transactions in financial assets and liabilities for means of payment or claims on future means of payment. Even many transactions in kind, such as barter transactions and remuneration in kind, could conceptually lead to counterpart transactions in financial assets (other accounts receivable) and/or liabilities (other accounts payable) when the timing of the exchange does not coincide. The sale of a good, service, or asset may have as its counterpart a change in currency or transferable deposit. Alternatively, the counterpart may be reflected as another type of financial asset or liability, such as other accounts receivable or payable.

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

  • Some transactions in financial assets and liabilities are simply exchanges of financial instruments.

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

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

  • The trading and settlement of financial derivative contracts.

9.4 All transactions that increase a unit’s holdings of assets are labeled acquisitions. All transactions that decrease a unit’s holdings of assets are labeled disposals. Transactions that increase liabilities are referred to as the incurrence of a liability. Transactions that decrease liabilities are variously titled repayments, reductions, withdrawals, redemptions, liquidations, or extinguishments. Thus, the results of transactions in a particular category of financial assets can be presented either as total acquisitions and total disposals or as net acquisitions. Similarly, changes in liabilities can be presented as total incurrences and total reductions or as net incurrences. Transactions that change a category of financial assets are never combined with transactions that change the same category of liabilities. That is, in GFS, the net acquisition of loans is not presented as the increase in loans held as financial assets minus the increase of loans as liabilities (also see paragraph 9.17).

9.5 As explained in paragraph 4.17, the net operating balance minus the net investment in nonfinancial assets equals net lending (+) / net borrowing (−). If the operating balance is not exhausted by the net investment in nonfinancial assets, the resulting surplus is called net lending (+). Alternatively, if the net operating balance is not sufficient to cover the net accumulation of nonfinancial assets, the resulting deficit is called net borrowing (−). Transactions in financial assets and liabilities explain how net lending/net borrowing is financed by means of changes in holdings of financial assets and liabilities—that is, total financing. In other words, the net acquisition of financial assets minus the net incurrence of liabilities is conceptually equal to net lending/net borrowing.

9.6 The remainder of this chapter describes first the valuation, time of recording, netting, and consolidation of transactions that affect financial assets and liabilities. It then provides details on transactions that affect specific categories of financial assets and liabilities. The classification of transactions in financial assets and liabilities by residence and sector of the counterparty is also discussed.

Valuation

9.7 The value of an acquisition or disposal of an existing financial asset or liability is its exchange value—that is, the current market price. The value of a newly created financial claim is generally the amount advanced by a creditor to a debtor.

9.8 All service charges, fees, commissions, and similar payments for services provided in carrying out transactions and any taxes payable on transactions are excluded from transactions in financial assets and liabilities. They are expense transactions classified as use of goods and services (22). In particular, when new securities are marketed by underwriters or other intermediaries as agents for the unit issuing the securities, the securities should be valued at the price payable by the purchasers. The difference between that price and the amount receivable by the issuing unit is a payment for the services of the underwriters. When dealers have a margin between their buying and selling prices, the buyer and seller record transactions in financial assets and liabilities at the same mid-price—that is, the midpoint between the buyer’s price and the seller’s price.

9.9 When a security is issued at a discount or premium relative to its contractual redemption value, the transaction should be valued at the amount actually payable for the asset and not the redemption value. Any interest that is prepaid jointly with the acquisition of a security should be treated as accrued interest that had been reinvested in an additional quantity of the security. In this case, the value of the acquisition is the sum of the amount paid for the security directly plus the amount prepaid for accrued interest. When issued at a premium, the difference between the redemption and issue price is amortized over the life of the instrument and reduces (rather than increases) the amount of interest accruing in each period.

9.10 In some cases, the value of a financial asset is determined by the value of the counterpart item to the transaction. For example, the initial value of a loan resulting from a financial lease is usually the value of the nonfinancial asset leased (if no initial down payments or fees are involved). The value of other accounts payable resulting from the purchase of goods or services is the value of the goods acquired or services received.

9.11 As mentioned in paragraph 3.119, the value of a transaction expressed in a foreign currency is converted to the domestic currency using the midpoint of the buying and selling exchange rates at the time of the transaction.2 If a transaction expressed in a foreign currency involves the creation of a financial asset or liability, such as other accounts receivable/payable, and is followed by a second transaction in the same foreign currency that extinguishes the financial asset or liability, then both transactions are valued at the exchange rates effective when each takes place.

9.12 Government units or public corporations may acquire or dispose of financial assets on a nonmarket basis as an element of their fiscal policy rather than as a part of their liquidity management. For example, they may lend money at a below-market interest rate or purchase shares of a corporation at an inflated price. It is generally accepted that concessional loans occur when units lend to other units and the contractual interest rate is intentionally set below the market interest rate that would otherwise apply. The degree of concessionality can also be enhanced with grace periods3 and frequencies of payments and maturity periods favorable to the debtor. Since the terms of a concessional loan are more favorable to the debtor than market conditions would otherwise permit, concessional loans effectively include a transfer from the creditor to the debtor. However, the means of incorporating the transfer impact within the SNA and other macroeconomic statistics have not been fully developed, although various alternatives have been advanced. Accordingly, until the appropriate treatment of concessional debt is agreed, information on concessional debt should be provided in supplementary tables, and in the memorandum items concessional loans at nominal value (6M391) and implicit transfers resulting from loans at concessional interest rates (6M392), discussed in paragraph 7.246.

Time of Recording

9.13 On an accrual basis, transactions in financial assets and liabilities are recorded when economic ownership of the asset changes—that is, when the asset is created or liquidated—and when the addition or reduction in the amount of the financial instrument occurs, such as the accrual of interest and subsequent reduction when debt service payments are made.4 This time is usually clear when the transaction involves an exchange of existing financial assets or the simultaneous creation or extinction of a financial asset and a liability. In most cases, it will be when the contract is signed or when money or some other financial asset is paid by the creditor to the debtor or repaid by the debtor to the creditor.

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

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

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

Netting and Consolidation of Flows

Netting

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

Table 9.1Net Acquisition of Financial Assets and Net Incurrence of Liabilities Classified by Instrument and Residence of the Counterparty
32Net acquisition of financial assets33Net incurrence of liabilities
3201Monetary gold and Special Drawing Rights (SDRs)3301Special Drawing Rights (SDRs)
32011Monetary gold
32012Special Drawing Rights (SDRs)
3202Currency and deposits3302Currency and deposits
3203Debt securities3303Debt securities
3204Loans3304Loans
3205Equity and investment fund shares3305Equity and investment fund shares
32051Equity33051Equity
32052Investment fund shares or units33052Investment fund shares or units
3206Insurance, pension, and standardized guarantee schemes [GFS]3306Insurance, pension, and standardized guarantee schemes [GFS]
32061Nonlife insurance technical reserves33061Nonlife insurance technical reserves
32062Life insurance and annuities entitlements33062Life insurance and annuities entitlements
32063Pension entitlements [GFS]33063Pension entitlements [GFS]
32064Claims of pension funds on pension manager33064Claims of pension funds on pension manager
32065Provisions for calls under standardized guarantee schemes33065Provisions for calls under standardized guarantee schemes
3207Financial derivatives and employee stock options3307Financial derivatives and employee stock options
32071Financial derivatives33071Financial derivatives
32072Employee stock options33072Employee stock options
3208Other accounts receivable3308Other accounts payable
32081Trade credit and advances33081Trade credit and advances
32082Miscellaneous other accounts receivable33082Miscellaneous other accounts payable
321Domestic debtors331Domestic creditors
3212–Same instrument breakdown as above, but3312–Same instrument breakdown as above, but

3218excluding monetary gold3318excluding SDRs
322External debtors332External creditors
3221–Same instrument breakdown as above

3321–Same instrument breakdown as above
32283328

Consolidation

9.18 As explained in paragraphs 3.152–3.168, consolidation is a method of presenting statistics for a set of units (or entities) as if they constituted a single unit. A consolidated set of accounts for a unit, or group of units, is produced by, first, an aggregation of all flows and stock positions within an agreed analytical framework, followed by the elimination, in principle, of all flows and stock positions that represent relationships among the units or entities being consolidated.

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

Arrears

9.20 As explained in paragraphs 7.247–7.250, arrears are defined as amounts that are both unpaid and past the due date for payment. In principle, amounts payable for any expense, for acquisition of nonfinancial assets, or related to any liability may become in arrears if the amounts are past due for payment (e.g., in the case of overdue debt service payments).

9.21 Some types of financial assets and liabilities, most notably debt securities, loans, financial derivatives, and other accounts receivable/payable, mature at scheduled dates, or series of dates, when the debtor is required to make specified payments to the creditor. If the payments are not made as scheduled, the debtor has effectively obtained additional financing by not making the scheduled payments. When arrears occur, no transactions should be imputed, but the arrears should continue to be shown in the same instrument until the liability is extinguished. However, if the contract provided for a change in the characteristics of a financial instrument when it goes into arrears, this change should be recorded as a reclassification in the form of other changes in the volume of the financial assets and liabilities (see paragraph 10.84). If the contract is renegotiated or the nature of the instrument changes from one instrument category to another (e.g., from bonds to equity), the resulting flow should be recorded as transactions in the repayment of the original liability and the creation of a new liability (see paragraph 3.97).

9.22 Nonetheless, interest accrues on liabilities in arrears (both principal and interest arrears) and is known as late interest. Late interest should accrue at the same interest rate as on the original debt instrument, unless the interest rate for arrears was stipulated in the original debt contract, in which case this stipulated interest rate should be used. The stipulated rate may include a penalty rate in addition to the interest rate on the original debt. For other liabilities in arrears, in the absence of other information, interest costs accrue on these arrears at the market rate of interest for overnight borrowing. Also, any additional charges relating to arrears (such as penalties) should be recorded as interest on arrears of the debtor at the time the charges accrue. If an item is purchased on credit and the debtor fails to pay within the period stated at the time the purchase was made, any extra charges incurred should be regarded as interest on arrears and accrue until the debt is extinguished.

9.23 When using the cash basis of recording, cash payments for the settlement of arrears should be recorded with a counterpart entry in the relevant categories of expense, net acquisition of nonfinancial assets, or net incurrence of liabilities. Recording arrears in this way recognizes the appropriate economic nature of these payments since they have not been recorded under the appropriate GFS categories in the past (see also paragraph 7.249).

Classification of Transactions in Financial Assets and Liabilities by Type of Financial Instrument and Residence

9.24Table 9.1 presents the classification of transactions in financial assets by type of financial instrument and residence. This classification is consistent with the classification of the same financial assets and liabilities employed in Chapter 7 (Table 7.9). Chapter 7 also provides full definitions of the financial assets or liabilities included in each category, and those definitions are not repeated here. The remainder of this section provides guidance only on those transactions for which the general guidance may not be sufficient.

9.25 In principle, the classification of transactions in financial assets and liabilities by residence is based on the residence of the units that are a party to the transaction being recorded. The classification of stock positions in financial assets and liabilities in a unit’s balance sheet (see paragraph 7.264) is based on the residence of the issuer of financial instruments (assets), and the residence of the holder of the financial instruments (liabilities). If a transaction in financial assets or liabilities between a resident and a nonresident unit involves an instrument originally issued by a resident, an entry in other changes in the volume of assets (reclassification) should be recorded to maintain the integrated GFS framework of flows and stock positions (see also paragraphs 9.85–9.87 and 10.79). In practice, available information may not permit the identification of the two parties to the transaction. Therefore, transactions recorded in the source data for external transactions in financial assets and liabilities may include those that take place not only between residents and nonresidents but also between two residents in nonresident financial assets and liabilities.

9.26 In addition to transactions in interest and principal on debt liabilities, general government and public sector units may undertake a range of complex debt-related transactions, such as assuming debt of other units, making payments on behalf of other units, debt rescheduling, debt forgiveness, debt defeasance, and financial leasing. The special features of these types of transactions are described in Appendix 3.

9.27 The classification of financial instruments in GFS, described in this chapter, does not include functional categories used in the Balance of Payment and International Investment Position, such as direct investment, portfolio investment, or international reserves.5

Monetary Gold and Special Drawing Rights (SDRs) (3201, 3211, 3221, 3301, 3321)6

Monetary gold (32011, 32211)

9.28 Transactions in monetary gold are the exclusive responsibility of the monetary authorities, which will normally be the central bank (a public financial corporation). It is possible, however, for a unit of the general government sector to undertake some monetary functions, in which case it may have transactions in monetary gold. When transactions in financial assets are classified by residence of the counterparty, the counterpart liability to transactions in monetary gold is shown as external because monetary gold can be held only as part of foreign reserves.7

9.29 Transactions in monetary gold can take place only between two monetary authorities or between a monetary authority and an international financial organization. If the monetary authority adds to its holdings of monetary gold by acquiring newly mined gold or existing gold offered on the private market, then the gold so acquired is said to have been monetized. No transaction in financial assets should be recorded. Instead, the acquisition of the gold should first be recorded as a transaction in nonfinancial assets, and then the reclassification of the gold as monetary gold should be recorded as an other economic flow. Demonetization of gold is recorded symmetrically (see paragraph 10.84).

9.30 Transactions in nonmonetary gold (including gold not held as reserves by the monetary authorities and all gold held by financial institutions other than the monetary authorities) are treated as acquisitions minus disposals of valuables (if the sole purpose is to provide a store of wealth) and otherwise as changes in inventories. Deposits, loans, and securities denominated in gold are treated as financial assets (not as gold) denominated in foreign currencies.

Special Drawing Rights (SDRs) (32012, 32112, 32212, 3301, 3321)

9.31 SDRs are held exclusively by participants of the IMF’s SDR Department and prescribed holders, and are transferable among them. The creation of SDRs (referred to as allocations of SDRs) and the extinction of SDRs (cancellations of SDRs) are recorded as transactions. Transactions in SDRs also take place when a holder exercises its right to obtain foreign exchange or other reserve assets from other participants and prescribed holders and when SDRs are sold, loaned, or used to settle financial obligations.

9.32 At the time of the SDR allocation, the amounts recorded as SDR allocations (liabilities) and holdings (financial assets) are identical and on the same public sector unit’s balance sheet. This public sector unit—as official holder—may, subsequently, exchange some or all of its SDR holdings (financial asset) with other official holders for a freely usable currency(ies) or to meet its liabilities. Consequently, the SDR allocations and holdings on the balance sheet of that public sector unit would no longer be identical; the SDR holdings would be less than the allocations because they have been exchanged. As a result, interest payable on the SDR allocation of that public sector unit will be larger than interest receivable on its SDR holdings. Interest receivable on the SDR holdings exchanged will accrue to the new holder. These transactions in SDRs (and resulting stock positions) are recorded at their gross amounts.

Currency and Deposits (3202, 3212, 3222, 3302, 3312, 3322)

9.33 Because the market price of domestic currency and deposits is fixed in nominal terms, the net acquisition of domestic currency and deposits is equal to the stock held at the end of the reporting period minus the stock held at the beginning of the period, adjusted for any currency that was lost, stolen, or destroyed. Calculation of the net acquisition of foreign currencies and deposits must exclude the effects of changes in exchange rates, which are recorded as holding gains or losses (as also mentioned in paragraph 10.23).

9.34 Currency is treated as a liability of the unit that issued the currency. Consequently, when a unit puts new currency into circulation, a transaction is recorded that increases its liability for currency. Usually, the counterpart to the increase in liabilities is an increase in the unit’s financial assets, most likely deposits.8 Transactions in gold and commemorative coins that do not circulate as legal tender are treated as transactions in inventories or valuables rather than currency (see paragraph 7.135). The cost of producing new currency is an expense transaction unrelated to the value of transactions in currency.

9.35 Transactions in unallocated accounts for precious metals (including gold) are classified under deposits (as explained in paragraph 7.15), except for transactions between two monetary authorities in unallocated gold accounts for reserves purposes. If a monetary authority acquires an unallocated gold account from a nonmonetary authority, the transaction is recorded as a transaction in currency and deposits and then reclassified as monetary gold (see paragraph 10.84).9

Debt Securities (3203, 3213, 3223, 3303, 3313, 3323)

9.36 Most transactions in bonds and other types of debt securities are covered by the general guidelines previously established. The accrual of interest on certain debt securities may deserve special attention and is summarized here (also see paragraphs 6.62–6.83). Interest is the amount debtors will have to pay their creditors over and above the repayment of the amounts advanced by the creditors. Interest accrues on a debt instrument for its entire life as determined by the conditions set at inception of the instrument. When payments are fixed in advance, accrued interest is determined using the original yield-to-maturity. A single, effective yield—established at the time of the security issuance—is used to calculate the amount of accrued interest in each period to maturity. This approach is known as the “debtor approach.”

9.37 Most debt securities have a fixed or variable interest rate and may also be issued at a discount or, possibly, a premium. In such cases, the interest receivable by the holders of the debt securities has two components:

  • The amount of money income receivable from coupon10 payments each period, plus

  • The amount of interest accruing each period attributable to the difference between the redemption price and the issue price.

9.38 On a cash basis, interest expense is recorded at the time it is paid in cash, with a reduction in currency and deposits as the counterpart.

Debt securities issued at par

9.39 For debt securities for which the issue and redemption prices are the same (i.e., issued at par), total interest accrued over the whole life of the debt securities is given by the periodic coupon payments. If coupon payments are fixed, accrued interest can be calculated by allocating the coupon payment to the relevant period using a daily compound formula.

Debt securities issued at a discount or premium

9.40 Debt securities issued at a discount (or premium), such as short-term bills of exchange and discounted and zero-coupon bonds, are recorded at the time of issue at the issue price.11 The difference between the discounted issue price of such debt securities and their price at maturity (redemption price) is treated as interest accruing over the life of the debt security. For each reporting period, the holder of the debt security should record a transaction for the receipt of interest revenue arising from the difference between the issue and redemption prices and its reinvestment in an additional quantity of the debt security. The issuer of the debt security records the accrual of interest expense and an increase in its liability for debt securities. For debt securities issued at a premium, the difference between the issue price and the price at maturity should be amortized over the life of the instrument, reducing (rather than increasing) the amount of interest accruing in each period. On a cash basis, interest resulting from the discount should be recorded as an expense on redemption of the bond. Interest resulting from a premium should be recorded as a reduction in interest expense at the time of issue.

Index-linked debt securities

9.41 With an index-linked debt security,12 an indexation mechanism links the amount to be paid at maturity or coupon payments (or both) to an indicator agreed by the parties. The values of the indicators are not known in advance. For debt securities with indexation of the amount to be paid at maturity, these amounts may be known only at the time of redemption. As a result, total interest flows before redemption cannot be determined with certainty. To estimate the change in the value of the debt security due to interest accrued before the values of the reference indicators are known, some proxy measures need to be used.

In this regard, it is useful to distinguish the following three arrangements:

  • Indexation of coupon payments only with no indexation of amount to be paid at maturity

  • Indexation of the amount to be paid at maturity with no indexation of coupon payments

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

9.42 The principles describing the transactions for these index-linked debt securities revolve around determining the value of interest and are discussed in paragraphs 6.75–6.78.

Debt securities with embedded derivatives

9.43 For debt securities with embedded derivatives,13 such as call, put, or equity conversion options, the recording of accrued interest is the same as for securities that do not have such features. For all periods leading up to the exercise of the option, the interest accrued is unaffected by the presence of the option. When the embedded option is exercised, the securities are redeemed and the accrual of interest ceases.

Loans (3204, 3214, 3224, 3304, 3314, 3324)

9.44 The terms of a loan contract frequently require periodic payments for all interest expense accrued since the previous periodic payment and a payment covering a portion of the original amount borrowed. On an accrual basis, interest accrues continuously over the reporting period and should be added to the principal; the payments of interest and principal are transactions in financial assets or liabilities (see paragraph 6.64). On a cash basis, periodic interest and principal payments are recorded as interest expense/revenue and transactions in financial assets or liabilities, respectively, when cash payments are made—no interest is accrued (see paragraph 6.65).

9.45 When goods are acquired under a financial lease, a change of economic ownership from the lessor to the lessee is deemed to take place, even though the leased goods remain legally the property of the lessor. This change in economic ownership is financed by a loan transaction: the lessor and lessee record a loan equal to the market value of the asset, this loan being gradually paid off over the period of the lease. The implication of treating a financial lease as a loan is that interest accrues on the loan. The rate of interest on the imputed loan equates the present value of the total amount payable in installments over the life of the lease (including any value to be repaid at maturity) with the market value of the asset at the time the lease is initiated. The installment covers interest accrued during the period as well as the component of the repayment of the principal.

9.46 As described in paragraphs 7.159 and 7.161, repurchase agreements and gold swaps are treated as loans with no change of economic ownership for the underlying assets that legally were sold. Similarly, the winding up of the repurchase agreement or swap according to the initial terms of the agreement is treated as a liquidation of a loan. The economic nature of an off-market swap is equivalent to a combination of borrowing (the lump sum) in the form of a loan transaction and an on-market swap transaction (financial derivative) (see paragraph 7.162).

Equity and Investment Fund Shares(3205, 3215, 3225, 3305, 3315, 3325)

Equity (32051, 32151, 32251, 33051, 33151, 33251)

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

9.48 Additions to the funds and other resources of a quasi-corporation, including in-kind transfers of nonfinancial assets, are treated as purchases of equity by the owner of the quasi-corporation. This includes new finance made available for use by the enterprise in purchasing fixed assets, accumulating inventories, acquiring financial assets, or redeeming liabilities. Similarly, receipt by the owner of proceeds from sales of any of the quasi-corporation’s assets, transfers in kind from the quasi-corporation, and withdrawals by the owner of accumulated retained earnings of the quasi-corporation are treated as reductions in equity by the owner. Liquidating dividends payable to shareholders when an enterprise becomes bankrupt (or is otherwise wound up) should also be recorded as withdrawal of equity.

9.49 For government units, regular transfers to corporations or quasi-corporations to cover persistent operating deficits are subsidies (251), but if payments from government are irregular and are made to cover accumulated losses or exceptional losses due to factors outside the control of the enterprise, they are treated as a capital transfer under capital transfers not elsewhere classified (2822).14 If government makes a transfer to a public corporation to finance all or part of the costs to finance its acquisition of nonfinancial assets, this also is recorded as equity unless there is no reasonable expectation of a sufficient rate of return on the investment, in which case the transfer is recorded as capital transfers not elsewhere classified (2822) (see Box 6.3). Regular withdrawals of the income from public corporations or quasi-corporations are property income under, respectively, dividends (1412) or withdrawals of income from quasi-corporations (1413). The exception occurs when dividends are disproportionately large relative to the recent level of dividends and earnings. Any dividends declared greatly in excess of the recent level of dividends and earnings should be treated as withdrawal of owners’ equity (32051, 32151, 32251, 33051, 33151, 33251) from the public corporation. This will be the case for distributions by public corporations to shareholders of proceeds from privatization receipts and other sales of assets and large and exceptional one-off payments based on accumulated reserves or holding gains.

9.50 Government units may acquire equity in a public corporation or quasi-corporation as a result of legislation or an administrative change creating the corporation or quasi-corporation. In some cases, this event will amount to a reclassification of existing assets and liabilities, which is recorded as an other economic flow that results in an addition of equity to the government unit’s balance sheet. An advance of funds to create the new enterprise is a transaction reflecting the purchase of equity. As explained in paragraph 6.121, retained earnings of a foreign direct investment enterprise are treated as if they were distributed and remitted to foreign direct investors in proportion to their ownership of the equity of the enterprise and then reinvested by them by means of additions to equity.

9.51 From time to time, corporations restructure their shares and may offer shareholders a new number of shares for each share previously held. These bonus shares are not, however, treated as transactions, but as a form of redenomination. If a public corporation buys its own shares, the transaction is classified as being a reduction in the equity liability, rather than an acquisition of an asset. Because a corporation cannot have a claim on itself, the liability is deemed to be extinguished, even if the shares are not canceled.

9.52 Membership dues and subscription fees payable to international organizations are treated as the acquisition of equity in cases when there is a possibility—even if unlikely—of repayment of the full amount.15 A capital contribution to an international organization or nonprofit institution is a capital transfer if it does not give rise to equity for the provider of the contribution (see paragraphs 6.94 and 6.124).

Privatization/Nationalization

9.53 Privatization generally is the disposal to private owners by a government unit of the controlling equity of a public corporation or quasi-corporation. Such a disposal is treated as a transaction in equity.16 If a public corporation or quasi-corporation sells some of its assets and provides part or all of the proceeds to its parent government unit, then the provision of the proceeds would also be a disposal of equity of the government unit. Brokers’ commissions and other privatization costs are expense transactions just as all other costs of ownership transfer related to the acquisition or disposal of a financial asset.

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

9.55 Nationalization is generally the acquisition from private owners by a government unit of the controlling equity of a private corporation or quasi-corporation. Such an acquisition is treated as a transaction in equity. In some exceptions, government units may acquire ownership of a private corporation or quasi-corporation by way of confiscation or appropriation. There is no payment to the owners (or the compensation is not commensurate with the fair value of the assets). This is not the result of a transaction by mutual agreement. The difference between the market value of the asset acquired and any compensation provided (a transaction) should be recorded as other changes in the volume of assets, in the form of an uncompensated seizure (see paragraph 10.62).17

Investment fund shares or units(32052, 32152, 32252, 33052, 33152, 33252)

9.56 Changes to the value of investment funds due to the issuance or repayment of shares or units are recorded as transactions. The increase (decrease) in the value of investment fund shares or units, other than from holding gains and losses, is recorded as distributed to the share- or unit holders and reinvested by the holders in the shares or units (see paragraph 5.121). This treatment is similar to the treatment of retained earnings of a foreign direct investment enterprise. Gains and losses arising from the value of an asset or fund to reflect its current market value are not recorded as transactions, but as holding gains or losses.

Insurance, Pension, and Standardized Guarantee Schemes [GFS] (3206, 3216, 3226, 3306, 3316, 3326)

9.57 General government units may incur liabilities for these reserves, entitlements, and provisions as operators of nonlife insurance and standardized guarantee schemes, nonautonomous pension funds, and unfunded pension schemes. General government units may acquire insurance technical reserves as financial assets in their capacity as holders of nonlife insurance policies. Public corporations can engage in all types of insurance activities.18 When operating standardized guarantee schemes, such as student loan guarantees, deposit guarantees, and export credit guarantees, general government units record transactions in liabilities for provision for calls under standardized guarantee schemes. These transactions in liabilities comprise:

  • Prepayments of net fees: fees prepaid in the reporting period less previously prepaid fees earned for the reporting period

  • Provisions for outstanding calls: expected calls less any expected asset recoveries on the standardized guarantees provided in the recording period less any calls settled in the recording period (see paragraphs A4.78–A4.80).

Nonlife insurance technical reserves [GFS] (32061, 32161, 32261, 33061, 33161, 33261)

9.58 In general, nonlife insurance premiums are paid in advance of the period covered by the policy. On an accrual basis, all such prepaid premiums are transactions that increase the insurance unit’s liability and the policyholder’s asset for insurance technical reserves. As the period covered by the premium progresses, the insurance unit continuously earns the premium, which requires a transaction to decrease its liability and the policyholder’s asset for nonlife insurance technical reserves.

9.59 When events occur giving rise to a valid claim, a transaction is recorded that increases reserves against outstanding claims as a liability of the insurance unit and an asset of the beneficiaries. If payment of the claim is delayed for a substantial length of time or consists of periodic payments over several reporting periods, the value of the transaction corresponds to the present value of the expected payments.

9.60 The change in unearned premiums and reserves against outstanding claims is shown as a transaction in liabilities of the insurer and a transaction in assets of the policyholders. The relevant transactions in revenue and expense are discussed in paragraphs 5.149–5.151 and 6.125.

9.61 On a cash basis, premiums received and claims paid are shown as a transaction in revenue and expense of the insurer and the policyholders when payments are made.

Life insurance and annuities entitlements (32062, 32162, 32262, 33062, 33162, 33262)

9.62 As noted in paragraph 7.179, it is unlikely for general government units to incur liabilities or hold assets with respect to life insurance and annuities, unless they provide such schemes to their employees. Changes in life insurance and annuities entitlements are transactions in liabilities for the insurer and transactions in financial assets for the policyholders. In the case of annuities, the transactions constitute a stream of ongoing payments, rather than a lump sum that reduces the liability. The treatment of life insurance and annuities is elaborated in paragraph A4.69.

Pension entitlements [GFS] (32063, 32163, 32263, 33063, 33163, 33263)

9.63 If a public sector unit operates a pension scheme, then it will have transactions in liabilities for pension entitlements.

9.64 For a defined-benefit scheme, actual and imputed social contributions receivable from employees, employers, or other institutional units on behalf of individuals or households with claims on the public sector unit for future pension benefits will increase the unit’s liability for pension entitlements. The increase in the existing liability (because the future payments are discounted over fewer periods) is recorded as a transaction in pension entitlements with the corresponding entry being an expense in the form of imputed social contributions, as explained in paragraph 6.117. Payments to retired persons or their dependents and survivors in the form of periodic payments or lump sums reduce the liability, with a decrease in currency and deposits as the counterpart entry. On a cash basis, the benefits paid should be recorded as an expense in the form of employment related social benefits [GFS] (273).19

9.65 For a defined-contribution scheme, transactions in pension liabilities for the pension fund are actual contributions receivable from employers on behalf of employees, from employees, and possibly from other individuals (formerly participating in a scheme, self-employed and unemployed persons, and retirees) plus contribution adjustments (property expense for investment income disbursement20) minus benefits payable. The same transactions in financial assets are recorded for the participants in the scheme. On a cash basis, transactions in liabilities of the insurance corporation are equal to social contributions and investment income received in cash minus benefit payments in cash.

9.66 On occasion, large one-off transactions (lump sums) may occur between a government and another institutional unit, often a public corporation, linked to pension reforms or to privatizations of public corporations. The goal may be to make the public corporation competitive and financially more attractive by removing existing pension liabilities from the balance sheet of the corporation. This goal is achieved by government assuming the liability in question in exchange for an asset or assets from the public corporation. If the value of the assets receivable is equal to the value of the liability assumed, the transaction is recorded as an exchange of assets and liabilities. However, the value of the asset(s) may not be the same value as the liability.

  • If the value of the asset(s) receivable is less than the value of the liability incurred, an expense in the form of a capital transfer from government to the public corporation should be recorded for the difference. The assumer (government) records an increase in liabilities for pension entitlements, an increase in the relevant financial and/or nonfinancial assets, and an expense in the form of capital transfer to the public corporation (see paragraph 6.124). The public corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and revenue in the form of a capital transfer from government.

  • If the value of the asset(s) receivable is more than the value of the liability incurred, a capital transfer from the public corporation to the government is recorded for the difference (see paragraph 5.148). The public corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and an expense in the form of a capital transfer to government.

9.67 Where a government unit assumes pension liabilities, the pension obligations absorbed by the social security fund continue to be classified as pension entitlement liabilities. These obligations are gradually extinguished as the benefits are paid out. As noted in paragraph 7.261, net implicit obligations for future social security benefits are shown as a memorandum item to the balance sheet.

Claims of pension fund on pension manager (32064, 32164, 32264, 33064, 33164, 33264)

9.68 As explained in paragraph 7.199, an employer may contract with a third party to administer a pension fund for its employees. When the funding of a deficit of the pension fund is the responsibility of the employer or other sponsor (pension manager), then a claim of the pension fund on the manager accrues. Similarly, if the employer or sponsor (pension manager) has a right to claim surpluses of the pension fund, then a claim of the manager to the pension fund may accrue.

Provision for calls under standardized guarantee schemes (32065, 32165, 32265, 33065, 33165, 33265)

9.69 As explained in paragraphs 7.201–7.202, standardized guarantee schemes have much in common with nonlife insurance and are thus recorded in similar ways. The treatment of standardized guarantee schemes is elaborated in paragraphs A4.78–A4.80.

Financial Derivatives and Employee Stock Options (3207, 3217, 3227, 3307, 3317, 3327)

Financial derivatives (32071, 32171, 32271, 33071, 33171, 33271)

9.70 Transactions involving financial derivatives may arise at inception, on secondary markets, with ongoing servicing (such as for margin payments), and at settlement. Transactions in derivatives preferably should be shown separately for assets and liabilities, whenever possible, but net settlements are acceptable when gross reporting is impractical. Any commission payable to brokers or other intermediaries for arranging a financial derivatives contract is treated as a payment for a service. In many cases, however, financial derivatives transactions involve implicit service charges, and it is usually not possible to estimate the service element. In such cases, the entire value of the transaction should be treated as a transaction in financial derivatives.

9.71 At inception:

  • The creation of a forward-type contract (see paragraphs 7.212–7.214) does not generally require the recording of a transaction in a financial derivative because risk exposures of equal value are usually being exchanged. That is, there is usually zero exposure and zero value for both sides. In some cases, however, there may be a nonzero transaction value at issue, such as with off-market swaps. (In addition, there may be a service charge for the issue.)

  • The purchaser of an option (see paragraph 7.209) pays a premium to the seller, which is the acquisition price of the instrument. Sometimes a premium is paid after the inception of the contract. In that case, the value of the premium is recorded at the inception of the contract in the same manner as if it had been paid then, but is shown as being financed by other accounts receivable/payable between the writer and the purchaser.

9.72 Subsequent changes in the prices of derivatives are recorded as holding gains or losses, not as transactions, as explained in paragraph 10.42.

9.73 Sales of options in secondary markets—whether exchanges or over the counter—are valued at market prices and recorded as transactions in financial derivatives.

9.74 When a contract requires ongoing servicing (such as an interest rate swap) and a cash payment is received, there is a decrease (increase) in a financial derivative asset (liability) if, at the time of the payment, the contract is in an asset (liability) position. If compilers are unable to implement this approach because of market practice, all cash receipts should be recorded as reductions in financial assets, and all cash payments should be recorded as decreases in liabilities.

9.75 Margins are payments of cash or deposits of collateral that cover actual or potential obligations incurred through financial derivatives—especially futures or exchange-traded options. As discussed in paragraph 7.219, repayable margins in cash are classified as transactions in deposits or other accounts receivable/payable, and nonrepayable margins are classified as transactions in financial derivatives.

9.76 At settlement, either a cash payment is made or an underlying item is delivered.

  • When a financial derivative is settled in cash, a transaction equal to the cash value of the settlement is recorded for the derivative. In most instances, when a cash settlement payment is received, a reduction in a financial derivative asset is recorded. When a cash settlement payment is made, a reduction of a financial derivative liability is recorded.

  • When an underlying item is delivered, two transactions are recorded:

    • The transaction involving the underlying item is valued at the market price at the time. The entry for the underlying item is recorded under the relevant heading (goods, financial instrument, etc.).

    • The transaction involving the derivative is valued as the difference, multiplied by the quantity, between the market price for the underlying item and the strike price specified in the derivative contract.

  • When more than one contract is settled—in cash, at the same time, and with the same counterparty—some of the contracts being settled are in asset positions and some are in liability positions. In this situation, transactions involving assets should be recorded separately from those involving liabilities, wherever possible, but net settlements are acceptable when gross reporting is impractical.

Employee stock options (32072, 32172, 32272, 33072, 33172, 33272)

9.77 General government units are very unlikely to issue stock options. Only entities with issued share capital can create employee stock options, so they may arise for public corporations in unusual cases. An employee stock option is created on a given date (the “grant” date), providing that an employee may purchase a given number of shares of the employer’s stock at a stated price (the “strike” price) either at a stated time (the “vesting” date) or within a period of time (the “exercise” period) immediately following the vesting date.

9.78 At the grant date, a transaction in employee stock options should be recorded as the corresponding entry to wages and salaries in kind (2112). The value of the employee stock options recorded as compensation should be spread over the period between the grant and vesting dates, if possible. Similarly, any increase in the value of the employee stock options between the grant and vesting date should be classified as compensation of employees. If this is not possible, for a pragmatic solution see paragraph 9.80.

9.79 When the option is exercised, the transaction in the employee stock option is recorded at a value that reflects the difference between the market price of the equity and the price paid by the buyer for the equity. Any change in the value between vesting date and exercise date is not treated as compensation of employees but as a holding gain or loss (see paragraph 10.43).

9.80 In practice, it is most unlikely that estimates of the costs of employee stock options to the employers are revised between the grant date and the exercise date. For pragmatic reasons, therefore, the whole of the increase between grant date and exercise date is treated as a holding gain or loss (see paragraph 10.43). Cancellation of employee stock options is recorded as other changes in the volume of assets (see paragraph 10.57).

9.81 Employee stock options do not generally raise separate issues to those for financial derivatives, but one special case occurs when an employee of a subsidiary is issued options for stock in the parent company. Because the parent is not the employer, the subsidiary records a transaction acquiring the option from the parent before granting the stock option to the employee. See also paragraph 7.222 regarding stock options provided to suppliers of goods and services to an enterprise.

Other Accounts Receivable/Payable (3208, 3218, 3228, 3308, 3318, 3328)

9.82 Other accounts receivable/payable consist of trade credits and advances and miscellaneous other items due to be paid or received. Transactions in trade credits occur when credit is extended directly to purchasers of goods and services. Advances are recorded for amounts paid in advance of work being performed, or for prepayments of goods and services (see paragraph 7.225).

9.83 Miscellaneous other accounts receivable/payable occur with respect to accrued but unpaid taxes, dividends, purchases and sales of securities, rent, wages and salaries, social contributions, social benefits, and similar transactions. Prepayments of taxes are also included in this category. Accrued but unpaid interest should be added to the principal of the underlying asset rather than included in this category.

9.84 This category is used to bridge the timing difference between the occurrence of economic events and the time the actual cash flows take place. It should not be used to record statistical discrepancies.

Classification of Transactions in Financial Assets and Liabilities by Sector and Residence

9.85 For a full understanding of financial flows and the role they play in government finance, it is often important to know not just what types of liabilities a general government unit uses to finance its activities and what types of financial assets it holds as investments. It is also important to know which sectors are providing the financing and what types of financial assets are held. In addition, it is often necessary to analyze financial flows between subsectors of the general government sector or the public sector. These flows of funds may be analyzed in a from-whom-to-whom framework.21Table 9.2 presents a classification of transactions in financial assets and liabilities based on the sector and residence of the two parties involved in the transactions.

Table 9.2Net Acquisition of Financial Assets and Net Incurrence of Liabilities Classified by Residence of the Counterparty
82Net acquisition of financial assets83Net incurrence of liabilities
821Domestic debtors831Domestic creditors
8211General government8311General government
8212Central bank8312Central bank
8213Deposit-taking corporations except the central bank8313Deposit-taking corporations except the central bank
82131Public deposit-taking corporations except the central bank83131Public deposit-taking corporations except the central bank
82132Private deposit-taking corporations83132Private deposit-taking corporations
8214Other financial corporations8314Other financial corporations
82141Other public financial corporations83141Other public financial corporations
82142Other private financial corporations83142Other private financial corporations
8215Nonfinancial corporations8315Nonfinancial corporations
82151Public nonfinancial corporations83151Public nonfinancial corporations
82152Private nonfinancial corporations83152Private nonfinancial corporations
8216Households and nonprofit institutions serving households8316Households and nonprofit institutions serving households
822External debtors832External creditors
8221General government8321General government
8227International organizations8327International organizations
8228Financial corporations other than international organizations8328Financial corporations other than international organizations
82281Central banks83281Central banks
82282Financial corporations not elsewhere classified83282Financial corporations not elsewhere classified
8229Other nonresidents8329Other nonresidents

9.86 An issuer of securities is usually not a party involved in a secondary market transaction in that security. However, when a transaction changes the residence or sector of the creditor, an entry in other changes in the volume of assets (reclassification) should be recorded to maintain the integrated GFS framework of stock positions and flows (see paragraphs 9.25 and 10.79).

9.87 The composition of the sectors listed in Table 9.2 is described in Chapter 2. All nonresident units are referred to collectively as the external sector (“rest of the world” sector in the 2008 SNA). In the GFS framework, it is important to know not only the total amount of financing receivable from nonresident units, but also the types of nonresident units supplying the financing.22 In GFS, therefore, the sector classification principles could also be applied to nonresident units. In particular, all foreign governments and international organizations are treated as separate sectors in Table 9.2.

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

9.88 A supplementary classification of the stock positions of debt liabilities and financial assets corresponding to debt instruments by maturity and type of financial instrument is of particular interest and is shown in Table 7.12. If analytically useful, the same classification structure could be applied for transactions in these debt liabilities and financial assets corresponding to debt instruments.

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

The difference between buying or selling prices and midpoint prices represents a service charge and should conceptually be reported as sales of goods and services (142) or use of goods and services (22). The service charge may be estimated from the average trade margin spread between the buying and selling rates. If not significant or not practical to identify, it is recommended to disregard any service charge in GFS.

The treatment of grace periods is discussed in paragraphs 6.69.

On the pure cash basis of recording, transactions are recorded when cash is paid or received. See Chapter 3 for more details on the cash basis of recording.

For information on these categories, see the BPM6, Chapter 6. See also Appendix 7 for more information on the linkages between GFS and the Balance of Payments and International Investment Position.

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

See paragraphs 7.126–7.130 for more details on monetary gold.

Seigniorage profits (i.e., the difference between the face value of currency issued and its costs of production, including the costs of base metals) for the issuer of currency are implicitly included under currency and deposits and are not treated as revenue.

See also BPM6, paragraph 9.20.

A coupon payment is a contractually agreed cash amount paid by the issuer of the debt security to the holder, at each coupon date. It is calculated from the coupon rate, face value of the debt security, and the number of payments per year, and may differ from the accrued interest if debt securities are issued at a discount or a premium.

The issue price is the actual amount paid—that is, after the discount has been subtracted or premium added.

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

As explained in paragraph 7.148, securities with an embedded derivative are classified entirely as debt securities. A separate financial derivate component is not recorded.

See Box 6.3 for more details.

In most cases, these membership dues and subscription fees should be recorded as an expense in use of goods and services (22) if there is an exchange of a payment for some form of a service or, if no exchange, as a current transfer not elsewhere classified (2821).

The public corporation is reclassified to a private corporation through an entry in other changes in the volume of assets and liabilities, as explained in Chapter 10.

The same treatment would apply to the acquisition of land or any other nonfinancial asset under a compulsory sale.

It is assumed that general government units do not operate life insurance schemes and do not purchase life insurance policies. The treatment of insurance technical reserves created by life insurance activities of public corporations is similar to autonomous pension funds, but is not addressed separately here. Also see the 2008 SNA, Chapter 17, and the BPM6, Appendix 6c.

The cash treatment differs from the accrual treatment because there are no imputations for contributions and accumulated liabilities in a cash-based system. Furthermore, in a cash system, the benefits paid cannot be regarded as compensation of employees because they are paid to retired employees, not current employees—there is no exchange of labor involved at the time.

Holding gains and losses generated by the investment of cumulated pension entitlements are not included in investment income.

See the PSDS Guide, Chapter 7, and Handbook on Securities Statistics, Part 2, for a detailed discussion of the from-whom-to-whom approach.

Often, in cases of traded debt securities, this will show only the initial holders.

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