Chapter

5. Positions, Flows, and Accounting Rules

Author(s):
Jose Cartas, and Qi He
Published Date:
June 2015
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5.1 The presentation tables outlined in this Handbook cover positions and flows. Chapter 5 provides the methodological framework for these data in terms of accounting rules and valuation principles.

5.2 The Handbook also explains the treatment of accrued interest for debt securities. See also Annex 1.

Quadruple-entry Accounting and Time of Recording

5.3 For an appropriate valuation of securities and the recording of accrued interest by issuers and holders of debt securities, securities transactions must be recorded on the basis of the quadruple-entry principle; the approach used to ensure consistency across accounts and sectors in international statistical standards (2008 SNA, paragraph 2.52). One implication of the quadruple-entry principle is that securities transactions, and other flows, are recorded at the same point in time or period of time in the various accounts for both units involved (2008 SNA, paragraph 2.54).

5.4 Following the principle of quadruple-entry accounting as applied in the 2008 SNA, the acquisition, disposal, issuance, and redemption of a security should result in the recording of four entries—two for each institutional unit involved in the transaction. These are either: (1) the holder and the issuer of the financial instrument; or (2) the two holders (i.e., the “new” holder receiving the securities and the “old” holder delivering them).

5.5 For example, an equity security is issued by a nonfinancial corporation (the issuer) and acquired by a household (the holder) in exchange for currency or transferable deposits. In the financial account of the nonfinancial corporation, an increase in liabilities (equity securities) and an increase in assets (currency or transferable deposits) are recorded. In the financial account of the household, an increase in one financial asset (equity securities) is offset by a decrease in another financial asset (currency or transferable deposits), with no change in liabilities recorded.

5.6 If a debt security held by a household is sold to a financial corporation, an increase in assets (currency or transferable deposits) and a decrease in assets (debt securities) are recorded in the financial account of the household. In the financial account of the financial corporation, an increase in one financial asset (debt securities) is offset by a decrease in another (currency or transferable deposits), or by an increase in liabilities (the financial corporation’s account vis-à-vis the household).

5.7 The quadruple-entry accounting rule implies that the balancing items net lending (+) / net borrowing (-) derived from the capital account and from the financial account of institutional sectors should be identical.

5.8 The general principle is that these transactions between institutional units should be recorded when claims and obligations arise, are transformed or are cancelled, that is, on an accrual basis (2008 SNA, paragraph 2.55).

5.9 In many cases there is a delay between the actual transaction and the corresponding payment or receipt. Therefore, national accounts usually record actual transactions on an accrual basis, not on a cash basis (2008 SNA, paragraph 2.56). These two different accounting approaches can result in transactions being recorded at different times.

Relationship between Positions and Flows

5.10 The international statistical standards record two basic types of data—positions and flows. Positions refer to the level of assets and liabilities at any point in time, while flows refer to economic actions and effects of events within an accounting period (BPM6, paragraph 3.2). In general, economic flows are described as transactions if they record interactions between institutional units that occur by mutual agreement and involve an exchange of value (2008 SNA, paragraphs 3.51 and 3.53).

5.11 Other flows are either revaluations or other changes in volume. The relationship between flows and positions for debt securities is presented in the equations below.

5.12 “Positions” for issuance and holdings of debt or equity securities are outstanding amounts at a specific point in time. “Flows” are the difference between the positions recorded at two specific points in time and consist of transactions between institutional units, revaluations, and other changes in volume during the period in question.

5.13 The relationship between positions and flows for issuance and holdings of securities is:

Positiont is the issuer’s or holder’s position in terms of securities at the end of accounting period t and positiont-1 is its position in terms of securities at the end of accounting periodt-1.

5.14Flowst indicates changes in positions between two specific points in time. It is the sum of all flows for securities, viewed as changes in financial assets or liabilities, during accounting period t. It comprises transactions, revaluations, and other changes in volume:

5.15Transactionst refers to net issuance (i.e., issuance minus redemptions) or net acquisitions (i.e., gross acquisitions minus disposals) of securities during accounting period t.

5.16 They measure, as changes in liabilities, the difference between gross issuance and redemptions and, as changes in financial assets, the difference between gross acquisitions and disposals during accounting period t.

or

5.17 For debt securities, gross issuance and gross acquisitions cover accrued interest.

5.18 Not all economic flows are transactions. Other economic flows include revaluations and other changes in volume.

5.19Revaluationst refers to changes in outstanding positions owing to changes in the price of securities during accounting period t. The revaluation of assets or liabilities stems from changes in their prices and/or changes in exchange rates.2 In the BPM6, revaluations are broken down into those that are due to changes in exchange rates and those that are due to “other price changes” (BPM6, paragraph 3.20b).

5.20Other changes in volumet refers to all changes in positions between the end of accounting period t-1 and the end of accounting period t that are due neither to transactions nor to revaluations (e.g., default).

Gross and Net Transactions

Gross Issuance, Redemptions, and Net Issuance of Securities

5.21 Gross recording of financial transactions in securities means that the incurrence and repayment of liabilities relating to debt and equity securities are shown separately as gross issuance and gross redemptions. Net recording means that the issuance of securities is shown net of redemptions.

5.22 Issuance relates to the situation where an issuer sells newly created debt or equity securities to holders. A security is considered to have been issued when the issuer transfers it to a holder, usually in exchange for currency or transferable deposits.

5.23 Redemptions of securities include all repurchases of the security. They are recorded as financial transactions that decrease the issuer’s liabilities (securities) and financial assets (currency or transferable deposits). They usually include all debt securities reaching their maturity date as well as early redemptions.3 For the creditor, the composition of financial assets changes (a decrease in holdings of securities and an increase in holdings of currency or transferable deposits).

5.24 Net issuance of securities is calculated as issuance minus redemptions. Transactionst indicates net issuance during accounting period t.

Gross Acquisitions, Disposals, and Net Acquisitions of Securities

5.25 Gross acquisitions and disposals of securities are financial transactions. These are used to analyze securities market activity and income generation.

5.26 Acquisitions are either: (1) purchases of newly issued securities from an issuer; or (2) purchases of existing securities from another holder on the secondary market. A security is considered to have been acquired when claims and obligations arise, usually in exchange for currency or transferable deposits. Acquisitions of securities are financial transactions. Purchasing securities from the issuer increases both the holder’s assets in securities and the issuer’s liabilities in securities, while purchasing securities from another holder on the secondary market increases the new holder’s assets in securities and decreases the old holder’s assets in securities (with counterpart entries in currency or transferable deposits).

5.27 Disposals of securities are either: (1) the sale of securities to issuers; or (2) the sale of securities to new holders on the secondary market. A security is considered to have been disposed of when an obligation ceases to exist owing to redemption, or a claim is transferred by means of a sale on the secondary market, usually in exchange for currency or transferable deposits. Disposals of securities are financial transactions. Selling securities to the issuer decreases both the holder’s assets in securities and the issuer’s liabilities in securities, while selling securities to a new holder on the secondary market increases the new holder’s assets in securities and decreases the old holder’s assets in securities (with counterpart entries in currency or transferable deposits).4

5.28 Net acquisitions of securities are gross acquisitions minus disposals. Transactionst refers to net acquisitions during accounting period t.

Revaluations

5.29 Revaluations and holding gains or losses reflect changes in the price of securities. For the holder, price increases mean positive revaluations or holding gains, while price decreases mean negative revaluations or holding losses. Revaluations also include changes in the value of securities denominated in foreign currency owing to movements in the exchange rate.

5.30 When market interest rates change, the market value of fixed rate debt securities varies inversely with the interest rate movements. However, the closer the debt security is to maturity, the lower the impact of a given interest rate change on its price.

5.31 Revaluations are recorded as they accrue, whether they are realized or not.

5.32 Four different situations can be distinguished with regard to the calculation of revaluations (2008 SNA, paragraph 12.81).

  • Where a security is held throughout the accounting period, the revaluation accruing during the accounting period is equal to the closing balance sheet value minus the opening balance sheet value, minus other changes in volume during the accounting period. These values are the estimated values of the assets if they were acquired at the times the balance sheets are drawn up. The revaluation (holding gain or loss) is unrealized.

  • Where a security held at the beginning of the period is sold during the period, the revaluation accruing is equal to the value at disposal minus the opening balance sheet value, minus other changes in volume during the accounting period (i.e., prior to the sale). The revaluation (holding gain or loss) is realized.

  • Where a security acquired during the period is still held at the end of the period, the revaluation accruing is equal to the closing balance sheet value minus the value at acquisition, minus other changes in volume during the accounting period (i.e., following the acquisition). The revaluation (holding gain or loss) is unrealized.

  • Where a security is acquired and disposed of during the accounting period, the revaluation accruing is equal to the value at disposal minus the value at acquisition, minus other changes in volume during the accounting period (i.e., between its acquisition and disposal). The revaluation (holding gain or loss) is realized.

5.33 The calculation of revaluations in the last case requires the collection of actual transaction data. In addition, revaluations can only be calculated approximately in the second and third cases using derived transaction data.

Other Changes in the Volume of Assets and Liabilities

5.34 Other changes in the volume of securities as assets and liabilities comprise changes in quantity that are not due to transactions, and changes in classification.

Changes in the Quantity or Physical Characteristics of Securities

5.35 Changes in the quantity or physical characteristics of securities may arise as a result of:

  • Accidental destruction owing to natural catastrophes or political events, or the destruction of evidence of ownership.

  • Losses caused by events (such as fire, damage, or theft) that are not considered catastrophic.5

  • Uncompensated seizures, where governments or other institutional units take possession of the assets of other institutional units (including nonresident units) without full compensation, for reasons other than the payment of taxes, fines, or similar levies.

  • In the case of debt securities, changes in financial claims resulting from write-offs or unilateral debt repudiation. These are not financial transactions because there is no mutual agreement between the parties. Thus, a creditor may decide that a financial claim can no longer be collected, for example, because of the bankruptcy or liquidation of the debtor, and remove the claim from its balance sheet. The creditor’s recognition that the claim is uncollectible is recorded as other changes in the volume of assets. The corresponding liability must also be removed from the balance sheet of the debtor to maintain balance in the accounts.6

Changes in Sectoral Classification and Structure

5.36 Changes in terms of classification comprise changes to the sector to which an institutional unit is allocated, changes to the structure of institutional units, and changes in the classification of assets (2008 SNA, paragraphs 12.64 to 12.67).

  • The legal status of an institutional unit may change (e.g., from a partnership to a corporation, and vice versa).

  • Reclassifications involving the moving of institutional units from one sector to another or changes in the structure of institutional units give rise to the reallocation of assets. This may cause the appearance and disappearance of certain financial assets, which should be recorded as other changes in volume.

  • When a corporation ceases to be an independent legal entity because one or more other corporations absorb it; all of that corporation’s positions in terms of securities vis-à-vis the corporation(s) that absorbed it disappear. Its positions vis-à-vis third parties remain unchanged and pass to the corporation(s) absorbing it. Changes in prices owing to the absorption are recorded as revaluations.

  • Similarly, when a corporation is legally split up into two or more institutional units, any new financial assets that may arise in the form of securities are recorded as other changes in volume.

5.37 Changes in the classification of assets, such as the conversion of debt securities into shares, are recorded as two financial transactions. Cancellations of debt securities by mutual agreement between the debtor and the creditor (debt cancellation or debt forgiveness) are recorded as transactions between the creditor and the debtor.

Valuation Principles

5.38 Issuance and holdings of securities should be recorded at market value, that is, at the midpoint between the buying and selling price where the securities are quoted on markets with a buy-sell spread (BPM6, paragraph 3.90).7 Positions are valued at the price at which the financial instrument could be bought in the market at the time the balance sheet is drawn up. Values observed in markets or estimated on the basis of observed market values should be used. Positions, transactions, and other flows of securities should be recorded using the same valuation principles for the accounts of all institutional units involved. However, ensuring consistent valuation on both sides of the balance sheet and the financial account is a challenging issue. For debt securities and listed shares in particular, the use of micro-data available in security-by-security (SBS) databases can help to address these measurement issues.

5.39 The presentation of issuance and holdings of securities at market value may be based on balance sheet data, but usually requires the availability of detailed information at the level of individual securities as contained in SBS databases.8

Valuation of Debt Securities

5.40 Market prices are the basic reference for valuation in the 2008 SNA, paragraph 2.59. Accordingly, this Handbook recommends that debt securities be presented at market value and that liability positions also be expressed in nominal value, although not transactions.

5.41 It means that debt securities issues should be recorded at both market and nominal value. Both values provide useful information from the perspective of monetary policy, fiscal policy, and financial stability analysis.

5.42 Whereas debt securities issues should be recorded at both market and nominal value, debt securities holdings should be recorded at market value.

Market value

Transactions

5.43 Transactions in debt securities are valued at the actual price agreed upon by the institutional units involved in the transaction (2008 SNA, paragraph 2.59). Under normal circumstances, the market value is the price at which debt securities are acquired or disposed of in transactions between willing parties, excluding commissions, fees, and taxes (2008 SNA, paragraph 3.122), but including accrued interest.

Positions

5.44 The market value of debt securities is the value at which they might be bought in markets at the time the valuation is required. It includes accrued interest. Ideally, values observed in markets or estimated from observed market values should be used (2008 SNA, paragraph 2.60).

The effect of coupon payments: dirty and clean prices

5.45 The dirty price of a debt security is the market price, including accrued interest due to coupon. The clean price does not include accrued interest due to coupon. Debt securities provide for coupon payments to be made to holders in accordance with a fixed schedule.9

5.46 The dirty price of a debt security will decrease when coupons are paid, with the result that its value will follow a sawtooth pattern. This is because there will be one less future cash flow (i.e., the coupon payment just received) at that point.

5.47 To separate out the effect of the coupon payments, the accrued interest between coupon dates is subtracted from the dirty price to arrive at the clean price. The calculation of accrued interest is based on the day count convention,10 the coupon, and the number of days since the preceding coupon payment date (the debtor approach).

5.48 Changes in the clean price reflect more closely changes in value attributable to issuer risk and changes in the market interest rates. Changes in the clean price follow a smoother pattern than changes in the dirty price. Use of the clean price also serves to distinguish interest accrued (based on the coupon) from revaluations (see the example described in Box 5.1).

Box 5.1Dirty and Clean Prices of Debt Securities

An example taken from Annex 1 of the Handbook can be used to illustrate the effect of coupon payments on dirty and clean prices. In this example, a five-year fixed interest rate bond of 1,000, repayable at maturity, is issued at par with annual fixed coupons of 100 during its life, which correspond to the market interest rate at the time of issuance (10 percent). The coupon is paid at the end of each year, accruing interest on a compound quarterly basis. It is assumed that changes in the market interest rate take place at the beginning of each year.

Because there is no change in the market interest rate during the first year, the only change in its market price is due to the accruing of interest. Therefore, the dirty price of the bond corresponds to its nominal value (face value plus interest accrued and not yet paid) and its clean price is equal to its face value (see paragraph 5.53). With changes in the market interest rate in the following years, the market price of the bond reflects not only the accrued coupon, but also valuation changes owing to changes in the discounted cash flow.

Table 5.1.1 shows the market value (dirty price) of the bond, the quarterly accrued interest due to coupon, and the market price without accrued interest (clean price). From this table, and the accompanying figure, it is possible to see how the use of clean prices results in a smoother path, compared with the sawtooth pattern of the dirty price approach.

Table 5.1.1Dirty and Clean Prices of a Five-year Fixed Interest Rate Bond
Point in TimeMarket value (dirty price)Accrued Interest on couponMarket value excluding accrued interest (clean price)
Beginning of quarter 11,000.00.01,000.0
End of quarter 11,024.124.11,000.0
End of quarter 21,048.848.81,000.0
End of quarter 31,074.174.11,000.0
Up to end of quarter 41,100.0100.01,000.0
End of quarter 4 = Beginning of quarter 5969.00.0969.0
End of quarter 5994.624.1970.5
End of quarter 61,020.948.8972.1
End of quarter 71,047.974.1973.8
Up to end of quarter 81,075.6100.0975.6
End of quarter 8 = Beginning of quarter 91,025.30.01,025.3
End of quarter 91,047.624.11,023.5
End of quarter 101,070.548.81,021.6
End of quarter 111,093.874.11,019.7
Up to end of quarter 121,117.6100.01,017.6
End of quarter 12 = Beginning of quarter 131,054.20.01,054.2
End of quarter 131,072.224.11,048.1
End of quarter 141,090.548.81,041.7
End of quarter 151,109.174.11,035.0
Up to end of quarter 161,128.0100.01,028.0
End of quarter 16 = Beginning of quarter 17982.10.0982.1
End of quarter 171,010.424.1986.3
End of quarter 181,039.448.8990.6
End of quarter 191,069.374.1995.2
Up to end of quarter 201,100.0100.01,000.0
End or quarter 201,000.00.01,000.0

Figure 5.1.1.Dirty and Clean Prices of a Five-year Fixed Interest Rate Bond

5.49 It is market practice to quote debt securities on a clean-price basis. When a debt security is traded or redeemed, the accrued interest is added to the value based on the clean price to reflect its market value, the dirty price.

5.50 Accordingly, many users prefer clean prices for analytical purposes. However, in the context of a system of institutional sector accounts and balance sheets analyzing detailed debtor/creditor relationships in terms of transactions, other flows and positions, the inclusion of accrued interest is appropriate.

Nominal value

5.51 The nominal value of a debt security refers to the outstanding amount the debtor owes to the creditor (2008 SNA, paragraph 3.157 (b)). It reflects the sum of funds originally advanced (the issue price), plus any subsequent advances, plus any accrued interest,11 less any repayments. The nominal value in domestic currency of a debt security denominated in foreign currency also includes revaluations arising from exchange rate changes (BPM6, paragraph 3.88 (b)).

5.52 Positions in debt securities holdings might also be valued at nominal value if such securities are designated as held-to-maturity securities. However, as positions, transactions and other flows should be recorded with the same value in the accounts of all the institutional units involved, debt securities as financial assets should be recorded at market value.

5.53 In practice, nominal value is often considered to be the same as face value. However, the two concepts are distinguished in the 2008 SNA. Face value is defined as the amount of principal to be repaid (2008 SNA, paragraph 3.157 (d)). It is equivalent to the redemption price of a debt security excluding accrued interest. The Handbook does not recommend the presentation of debt securities at face value. As stated previously, the Handbook recommends that debt securities be presented on a market value basis and that liability positions be expressed also in nominal value (although not transactions). (See paragraph 5.42.)

Foreign exchange revaluations

5.54 Foreign exchange revaluations reflect changes in the value of securities denominated in foreign currencies attributable to exchange rate movements. They are recorded as revaluations, separately from other changes in the market price of the securities (see Box 5.2).

Interest Accrued on Debt Securities

5.55 Interest accrued on debt securities is the amount that the issuers of debt securities become liable to pay over a given period of time without reducing the principal outstanding (2008 SNA, paragraph 7.113). Interest accrued is income and also a financial transaction to the extent that the interest is accrued but not yet paid (as if the accrued interest were promptly reinvested in debt securities) (BPM6, paragraph 11.49). This transaction is reversed (giving rise to a redemption of debt securities) when the interest accrued is actually paid.12

The debtor approach and the creditor approach to recording accrued interest

5.56 There are two ways to define interest for debt securities, the debtor approach and the creditor approach (see Box 5.3).13

5.57 The debtor approach defines interest from the perspective of the issuer of debt securities, while the creditor approach defines interest from the perspective of the holder of debt securities.

5.58 International statistical standards apply the debtor approach when recording accrued interest. The Handbook also recommends following this approach by defining accrued interest as in paragraph 5.55.

5.59 Book value financial accounting and reporting follows the approach that debtors should report interest due and accrued on their outstanding debt. Asset holders use a net yield concept that comprises interest due and accrued, including or excluding the current period amortization of the acquisition cost of the debt security asset(s). This means that across the institutional sectors of an economy, interest receivable and payable may be not equal.

5.60 Under the creditor approach, interest accrued reflects current market conditions and expectations. At any point in time, interest accrued is determined using the current yield to maturity (BPM6, paragraph 11.50 (a) and (b)).

Interest payable by type of debt security

Bills and similar debt securities

5.61 Interest on bills and similar debt securities is measured by the discount on the bill, that is, the difference between the sum paid to the holder of the bill when it matures and the amount received at the time of issue (2008 SNA, paragraph 17.264).

Bonds and debentures

5.62 For a bond issued at a discount or a premium, the difference between the redemption price and issue price constitutes interest that accrues period-by-period over the life of the bond, in the same way as for a bill (2008 SNA, paragraph 17.269).

Zero-coupon bonds

5.63 Zero-coupon bonds do not entitle their holders to any payment during the life of the security, but only to receive a stated fixed sum as repayment of principal on a specified date or dates. When zero-coupon bonds are issued, they are sold at a price that is lower than the price at which they are redeemed at maturity, reflecting the interest cost over the lifetime of the bond. The difference between the redemption value and issue price of a zero-coupon bond represents interest accruing continuously over the life of the security until its maturity (2008 SNA, paragraphs 17.270 and 17.271).

Index-linked debt securities

5.64 In line with the BPM6, the Handbook recommends classifying all index-linked debt securities (except those linked to a foreign currency) as variable interest rate debt securities. A debt security is classified as a variable interest rate security if the indexation applies to the principal, or coupons, or both (BPM6, paragraph 5.113).

Box 5.2Aggregation of Securities Denominated in Various Currencies—Positions and Flows

The compilation of global aggregates requires a method for converting securities denominated in various currencies into one common currency.

Securities positions and flows (transactions, revaluations, and other changes in the volume of assets) are aggregated in different ways. While positions are measured at a given point in time, flows are measured over a period. However, there is a relationship between positions and flows according to the equation Positiontpositiont − 1 = flowst.

The example presented in Table 5.2.1 describes the aggregation of securities denominated in different domestic currencies.

Table 5.2.1Aggregation of Securities Denominated in Various Currencies
ItemPosition at t − 1Position at tChange in positionsAggregation effect owing to different methods for converting changes in positions into currency C
Revaluation by converting, first, the positions denominated in currency A and B into positions denominated in currency C and then deriving the changes in positionsRevaluation by deriving, first, the changes in positions denominated in currency A and B and then converting the changes in positions into currency C
Security x denominated in currency A150.00100.00−50.00
Security y denominated in currency B60.0080.0020.00
Exchange rate A/C1.201.501.35
Exchange rate B/C2.302.102.20
Security x denominated in currency C125.0066.67−59.33−37.0421.30
Security y denominated in currency C26.0939.1012.019.092.92
Total151.09104.76−46.33−27.9519.38

Table 5.2.1 shows that the change in positions can be compiled in two ways when positions and flows of securities denominated in various currencies are converted into a common currency. Either: (1) the positions in currency A and in currency B are converted into currency C and the changes in positions are derived afterwards (−46.33 in the table represents an estimate of the revaluation); or (2) the changes in positions are compiled first in terms of currencies A and B and then converted into currency C (−27.95 in the table represents an estimate of the revaluation).

The changes in positions compiled according to these two methods are not the same; the size of the difference (interpreted as an aggregation effect) depends on the volatility of the exchange rates involved. As a convention, the Handbook recommends the first method of aggregating positions and flows denominated in various currencies into a common currency.

Valuation of Equity Securities

Transactions

5.65 Transactions in equity securities are valued using the actual price agreed upon between the institutional units involved in the transaction. Under normal circumstances, the market value is the price at which these financial instruments are issued, redeemed, acquired, or disposed of in transactions between independent, willing parties, excluding commissions, fees, and taxes.

5.66 New shares are recorded using their issue value, which is the nominal value plus/minus the issue premium/discount.

5.67 Transactions in shares in circulation are recorded using the transaction value. When the transaction value is not known, it is approximated using the stock exchange’s quotation or market price for listed shares and using the equivalent market value for unlisted shares.

Box 5.3Debtor Approach and Creditor Approach to Recording Accrued Interest

Under the debtor approach, when debt securities are issued at a fixed rate, the rate of interest payable, and accruing, is fixed at the time the debt security is issued. That is, if the debtor issues a debt security for 100 with an original maturity of ten years, at a fixed rate of 10 percent, with interest payable annually, the interest payments each year are 10 for the next ten years. The rate has been fixed by contract and is therefore not affected by changes in the market interest rate; and the cost of borrowing is known over the life of the debt instrument. By contrast, if the debtor had wanted to borrow at rates that changed along with market rates, the borrowing would have been undertaken at a variable interest rate.

Under the creditor approach, the prevailing market rate observed during the period is used to determine the interest paid on a debt security. The rate of interest on the debt security is not fixed but fluctuates with market conditions: as interest rates in the market change, the price of, and hence the return on, the debt security change. As interest flows apply to a period of time and interest rates change almost continuously, the average of the prevailing rate applicable to the debt security over the period is used. This method is more consistent with an active portfolio management approach because it shows the returns vis-à-vis the market value of the portfolio.

There are no differences between the two approaches if the value of the debt security remains unchanged throughout its life. However, the market value of a debt security does in practice vary during its life and debt securities are usually bought and sold on secondary markets. The recording of revaluations and also of realized holding gains and losses in accordance with the debtor approach therefore usually deviates from the corresponding recording following the creditor approach, as illustrated in the example described below.

Suppose a zero-coupon bond is issued on January 1 of year 1. The bond matures on December 31 of year 3 with a redemption value of 100. The discount (interest) rate at the time of issuance is 10 percent and so the value of the bond at issuance is 75.13. The market interest rate remains at 10 percent until January 1 of year 2, when it moves to 15 percent. The change in the interest rate causes the price of the bond to fall from 82.64 (=100/1.102) to 75.61 (=100/1.152). The market interest rate then remains unchanged until the bond matures.

The following table shows the developments in the nominal value, the accrued interest due to discount, the market value, and the revaluations arising from market price changes during the life of the zero-coupon bond. It also shows the accounting entries to be made in the debtor’s accounts (income, financial, and revaluation accounts and the balance sheet). The creditor would record corresponding entries on the opposite sides of the accounts.

As there is no change in the market interest rate in year 1, the same accounting entries are recorded under both the debtor approach and the creditor approach.

Under the debtor approach, interest accrues continuously, in the amount of 7.51 in year 1, 8.26 in year 2, despite the increase in the interest rate at the beginning of the year, and 9.09 in year 3. Revaluation is derived residually to ensure that the flows are equal to the changes in stocks (11.35 − 8.26 = 3.09, in year 2 and 13.04 − 9.09 = 3.95, in year 3).

Under the creditor approach, the rise in the market interest rate at the beginning of year 2 is fully reflected in the revaluation, and so the market value changes from 82.64 to 75.61 (=−7.03), while interest accrues in the amount of 11.34 in year 2 (=75.61 × 0.15). As there is no change in the market value in year 3, no revaluation is recorded, while interest accrues of 13.04 (86.96 × 0.15).

Table 5.3.1Debtor Approach and Creditor Approach to Recording Accrued Interest
Stocks and flows during the life of a zero-coupon bond
Start year 1End year 1Start year 2End year 2End year 3Total
Characteristics of the zero–coupon bond
Nominal value without accrued interest75.1375.1375.1375.1375.13
+ Accrued interest due to discount7.517.517.51

+8.26

=15.78
7.51

+8.26

+9.09

=24.87
24.87
= Nominal value75.1382.6482.6490.91100.00
+ Revaluations arising from market price changes−7.03−3.950.00
= Market value75.1382.6475.6186.96100.00
Debtor approach
Interest payable7.517.517.51

+8.26

=15.78
7.51

+8.26

+9.09

=24.87
24.87
Revaluation of liabilities in debt securities−7.03+3.083.95
Liabilities in debt securities75.1382.6475.6186.96100.00
Creditor approach
Interest receivable7.517.517.51

+

11.34

=18.86
7.51

11.34

+

13.04

=31.90
31.90
Revaluation of liabilities in debt securities−7.030.000.00
Claims in debt securities75.1382.6475.6186.96100.00

5.68 Scrip dividend shares are shares valued at the price implied by the issuer’s dividend proposal and distributed in lieu of cash dividends.

5.69 Issuance of bonus shares is not recorded. However, where the issuance of bonus shares involves changes in the total market value of a corporation’s shares, those changes in market value are recorded in the revaluation account.

5.70 Data on transactions may also be derived from the relevant position data. In this case, transaction prices will usually have to be estimated, for example, by taking unweighted average prices at the beginning and end of the reporting period.

Positions

Listed shares

5.71 Listed shares are valued at market value. The same value is adopted for both the assets side and the liabilities side, although shares (and other equity) are not, legally, a liability on the part of the issuer, but represent the right for the holder to a share in the value of a corporation on liquidation, where the liquidation value is not known in advance.

5.72 Listed shares are valued at a representative mid-market price observed on a stock exchange or other organized financial market (see Box 5.4). There are two possible approaches for the valuation of positions where a large corporation is listed on various stock exchanges (multiple listings): (1) the price on the stock exchange deemed to be most representative; or (2) the average of the market prices available on the various stock exchanges.

Unlisted shares

5.73 Fair values for unlisted shares, which are not traded on organized markets, should be estimated with reference to market equivalents.

5.74 The 2008 SNA and BPM6 establish six different methods for the valuation of unlisted shares. These methods are based on the use of:

  • Recent transaction prices.

  • Net asset values, based on accounting data.

  • Present values or price-to-earnings (P/E) ratios, by discounting forecasted future profits.

  • Market capitalization or price-to-book-value (P/B) ratios.

  • Own funds at book value (OFBV).

  • The apportioning of global values.

5.75 These methods may take into account the differences between listed and unlisted shares (notably as regards their liquidity) and consider the net worth accumulated over the life of a corporation, as well as its line of business. However, differences in estimates may also be the result of different valuation methods, with no conceptual interpretation possible.

5.76Annex 8 contains a more detailed description of the valuation methods for unlisted shares.

Income Attributed to Holders of Equity Securities

5.77 Income attributed to holders of equity securities is part of property income. Property income accrues when the owners of financial assets and natural resources place them at the disposal of other institutional units. Income received in return for the use of financial assets is called investment income.

5.78 Owners of equity securities receive a share of distributed earnings, the timing and level of which are decided by corporations. Equity securities income includes dividends (2008 SNA, code D421) as part of the distribution of corporations’ income (2008 SNA, code D42).

5.79 The distribution of corporations’ income in the form of withdrawals from the income of quasi-corporations (2008 SNA, code D422) is not part of the income attributed to holders of equity securities, as it is not based on shares.

Dividends as property income

5.80 Dividends are a form of property income to which owners of certain types of shares become entitled as a result of placing funds at the disposal of corporations. Dividends cover all distributions of profits by corporations to their shareholders or owners. Dividends are recorded gross of any withholding taxes deemed to be payable by recipients of such income.

5.81 Dividends also include:

  • Shares issued to shareholders as a dividend payment for the financial year (although bonus shares—which represent the capitalization of own funds in the form of reserves and undistributed profits and give rise to new shares for shareholders in proportion to their existing holdings—are not included).

  • Income paid to general government by public enterprises that are recognized as independent legal entities and do not constitute corporate enterprises.

  • Income generated by activities and transferred to the owners of corporations participating in these activities for their own private use.

Box 5.4Share Prices and Share Price Indices

Share prices, bids, asks, and spreads

Once a stock has been listed, its shares are bought and sold on a stock exchange or other organized financial market. Such exchanges are organized trading systems in which the prices of stocks are set (and thereafter fluctuate) by means of supply and demand in an auction context. Like all assets, the price of a share is sensitive to demand and many factors will influence demand for a particular share. Share prices are essentially driven by profit expectations, but market sentiment (e.g., bullish, bearish, or herding behavior) can also affect share prices. Analysts seek to understand the market conditions that lead to price changes, or even to predict future price levels.

The “current price” is the price of the most recent trade completed for the share. It is not necessarily the price to be paid or received for a share if an order has just been placed at that moment. During the market day, share quotes are typically delayed by 15 to 20 minutes, unless a real-time quote has specifically been requested. Share prices change frequently, so the last price may no longer be very up-to-date. The highest and lowest prices at which shares have been bought or sold on that day are also usually displayed.

The price quoted may include information on the bid and ask prices for the share. The bid price is the highest price that a brokerage firm (i.e., a market-maker) is willing to pay for a share at a particular time, as with an auction. The ask price is the lowest price at which a brokerage firm is willing to sell a share. The spread is the difference between the bid and ask prices for a traded share.

Share price indices

Share price indices may be classified in various ways. A “world” or “global” share price index (or stock market index) includes (typically large) corporations and corporate groups, regardless of where they are located or trade. Two examples are the Morgan Stanley Capital International (MSCI) World and Standard & Poor’s (S&P) Global 100 indices.

A “national” index indicates the performance of the stock market of a given country and, by extension, reflects investor sentiment regarding the state of the national economy. The most regularly quoted share price indices are national indices composed of the stocks of large corporations listed on the country’s largest stock exchange (e.g., the U.S. S&P 500, the Japanese Nikkei 225, the German Deutscher Aktienindex (DAX), the Russian Trading System Index (RTSI) and the British Financial Time Stock Exchange (FTSE) 100). The concept can be extended far beyond an individual exchange by representing the stocks of nearly all publicly traded corporations in an economy. More specialized indices track the performance of specific sectors of the economy, corporations of a certain size, or companies with a certain type of management. Another point to note is the distinction between price return and total return indices (called simply “price” and “return” indices). Some are price indices (e.g., the FTSE), while others are return indices (e.g., the German DAX), and a third group has both features (e.g., the EURO STOXX 50). Some indices, such as the S&P 500, have a number of different versions. These can differ in terms of the manner in which index components are weighted and the way that dividends are accounted for. For example, there are three versions of the S&P index: (1) a price return version, which considers only the price of the components; (2) a total return version, which accounts for the reinvestment of dividends; and (3) a net total return version, which accounts for the reinvestment of dividends after the deduction of a withholding tax.

An index may also be classified on the basis of the method used to determine its value. In an equally weighted index, the price of each individual stock is the only consideration when determining the value of the index. Thus, a change in the price of a single security can heavily influence the value of the index, ignoring the relative size of the corporation in question. By contrast, a market value weighted or capitalization weighted index takes the size of the corporation into account. Thus, a relatively small shift in the share price of a large corporation can strongly influence the value of the index. In a market share weighted index, a share price is weighted on the basis of the number of shares, rather than their total value. A modified capitalization weighted index is a cross between a capitalization weighted index and an equally weighted index. It is similar to the former with one main difference: the largest stocks are capped at a percentage of the weight of the total share index and excess weight is redistributed equally among the stocks under that cap.

5.82 There are usually three different types of dividend payment:

  • Dividends paid in cash.

  • Interim dividends.

  • Scrip (or stock) dividends.

Dividends paid in cash

5.83 Dividends paid in cash are the most common form of dividend payment.

5.84 Under legislation on public limited companies and limited liability companies, a corporation may only distribute as dividends its annual profits (based on its final income statement for the last year and other equity), following certain deductions. These provisions prevent, among other things, the distribution of interim dividends based on income statements that have not yet been approved.

5.85 Under the same legislation, the distribution of dividends may include any transfer of value, which directly or indirectly benefits shareholders. This notwithstanding, it is assumed that most dividends are paid in cash.

Interim dividends

5.86 Interim dividends are usually paid to shareholders if the preliminary income statement indicates a profit.14

5.87 Interim dividends are recorded as property income to the extent that they are related to the accrued income of the corporation. In practice, two conditions must be fulfilled:

  • The corporation making the payment must make short-period accounts available to the public and the payment must be based on at least two quarters.

  • The interim payment should be based on the same proportion of profits as the dividends paid in previous years; consistent with the usual rate of return for shareholders; and in line with trend growth for the corporation.

5.88 If these conditions are not met, the interim payment is recorded as an advance payment until final annual figures are available, given the need to compare interim dividends with entrepreneurial income for the year.

Scrip (or stock) dividends

5.89 A scrip (or stock) dividend is a pro-rata dividend payment made to shareholders in the form of additional shares. It essentially represents the capitalization of earnings and is an alternative to distributing cash dividends. It is therefore treated as income (in the primary income account), which is then immediately reinvested (in the financial account).

5.90 Additional shares distributed to shareholders may be:

  • Newly issued shares financed using the corporation’s own funds.

  • Treasury shares (i.e., reacquired stock bought back by the issuing corporation).

5.91 As with any scrip issue, the shares issued in order to pay a scrip dividend need to come from the capitalization of reserves.

5.92 A dividend reinvestment plan/program (DRIP) is a means of allowing shareholders to reinvest their dividends cheaply by purchasing more shares in a corporation. From the shareholder’s point of view, a DRIP is similar to receiving a scrip dividend, but there are important differences:

  • A DRIP does not keep cash within the corporation.

  • There are (low) dealing costs.

  • The number of shares that a shareholder receives depends on the price on the day that the DRIP operator purchases the shares.

5.93 The advantage of a scrip dividend compared with a DRIP is that there are no dealing costs. Furthermore, the shareholder can make an informed decision as to whether to accept shares rather than cash because the number of shares that will be received is known in advance. Shareholders who wish to reinvest will usually prefer scrip dividends to a DRIP.

Time of recording of dividends

5.94 Dividends are recorded at the point when the share price begins to be quoted on an ex-dividend basis, rather than at a price that includes the dividend (2008 SNA, paragraph 7.130). Although dividends represent part of the income generated over a given period, they are recorded after they have been declared but before they are actually payable. This means that the dividend has still to be paid to the owner on the date that it is declared. Consequently, a share sold “ex-dividend” is worth less than one sold without this constraint.

Transactions not defined as dividends

5.95 Dividends do not include the following:

  • Bonus shares, that is, new shares issued to all stockholders in proportion to their existing holdings are not considered to be dividends and must be clearly distinguished from scrip/stock dividends. They are not treated as transactions either, because there has been no effective change in terms of the underlying instrument. Shareholders’ claims on the relevant entity do not change as a result of the issuance of bonus shares (see paragraph 6.49).15

  • Liquidation dividends, whether partial or total, arising mainly at the time a corporation is terminated. These are treated as the withdrawal of investment and are, by convention, shown in the financial account, based on the assumption that liquidation dividends are more likely to involve previous equity finance than current income.

  • Funds withdrawn by means of the sale or disposal of a quasi-corporation’s assets (e.g., the sale of inventories, fixed assets, or land or other natural resources). Funds resulting from such disposal of assets are recorded as the withdrawal of equity from the quasi-corporation in the financial account.

  • Exceptional payments by corporations (including quasi-corporations, such as branches) that are made using accumulated reserves or stem from the sale of assets. Such exceptional payments are treated as the withdrawal of equity and are, therefore, recorded in the financial account. They are sometimes called “super dividends” (see Box 5.5). Payments are usually considered to be exceptional in nature if they are not in line with recent trends.

Box 5.5Super Dividends

Super dividends are dividends that are large relative to recent dividends and earnings (2008 SNA, paragraph 7.131). The concept of distributable income is used in order to assess whether dividends are large. The distributable income of a corporation is equal to entrepreneurial income plus all current transfers receivable, minus all current transfers payable and minus the adjustment for the change in pension entitlements. The ratio of dividends to distributable income over the recent past is used to assess the plausibility of the current level of dividends. If the level of dividends declared is greatly in excess of that seen in the recent past, those dividends are treated as financial transactions and termed “super dividends.” These super dividends are treated as the withdrawal of owners’ equity. This applies to all corporations, whether incorporated or quasi-incorporated and whether under foreign or domestic private control.

In the case of publicly traded corporations, super dividends are large and irregular payments, or payments that exceed the entrepreneurial income for the relevant accounting period, which are funded using accumulated reserves or through the sale of assets. The super dividends of publicly traded corporations are to be recorded as the withdrawal of equity to the extent that they exceed entrepreneurial income for the relevant accounting period.

Aggregation, Consolidation, and Netting

Aggregation

5.96 Aggregation is the summation of positions, transactions, revaluations or other changes in the volume of assets and liabilities for institutional units belonging to a specific sector or subsector of an economy.

Consolidation

5.97 Consolidation involves the elimination of positions, transactions, revaluations and other changes in the volume of assets and liabilities between institutional units belonging to the same group.16 Consolidation can be applied at various levels.

5.98 Institutional units can be grouped together or consolidated in two ways. They can be consolidated at subsector, sector, or national level, or at the level of corporate groups. Consolidation at subsector, sector, or national level eliminates issuance and holdings of securities within those various levels. Corporate groups may span sectors or subsectors and thus represent a different taxonomy of units, with entities generally clustered together on the basis of control relationships, rather than functional characteristics. Consolidation at group level eliminates securities held/issued by institutional units within the same group of financial or nonfinancial corporations as the issuer/holder. Institutional units report on a consolidated basis.

5.99 Consolidated presentations entail a reduction in statistical information. However, in some cases, it may be analytically useful to present data that have been consolidated at subsector, sector, or national level—for example, in the case of debt securities issued and held by money-issuing corporations. Another example is the debt securities holdings of general government. When these are consolidated, the holdings of debt securities of general government subsectors other than central government are consolidated with the corresponding debt securities issues of central government. These debt securities do not appear in issues and holdings statistics. Short-term debt securities held and issued by money-issuing corporations may also be presented in consolidated form if they are included in broad money.

5.100 Consolidation at the corporate group level is an example of consolidation on the basis of control relationships. If related institutional units are grouped together to form a single corporate group (for example, domestic and foreign subsidiaries of domestic banks are grouped together with their parent bank), all intra-group positions and flows are eliminated from the information reported. Thus, all positions and flows between the various subsidiaries and between those subsidiaries and the parent corporation are eliminated. This approach is useful for financial stability analysis (see Annex 7).

5.101 However, this Handbook focuses on the unconsolidated presentation of securities issues and holdings, which is recommended for monetary and macroeconomic analysis. Such a presentation sums up gross positions, transactions, revaluations, and other changes in the volume of assets and liabilities of institutional units belonging to a sector or subsector vis-à-vis all institutional units belonging to the same sector or subsector, to other sectors of the economy, and to other economies.

Netting

5.102 The term “net” is used as follows: (1) net recording means summing all debits and credits for a financial asset or liability category or subcategory (described in Chapter 6); and (2) netting of an asset against a liability.

5.103 Net recording refers always to aggregations for which all debit entries of a particular asset or liability are netted against all credit entries in the same asset or liability type (e.g., bond issues are netted against bond redemptions).

5.104 When the term “net” is used together with a category of financial instrument (net financial instrument), such as “net financial derivatives,” netting of a financial asset against the same type of liability is understood (BPM6, paragraph 3.114).

1

Disposals do not cover write-offs. Write-offs must be treated as other changes in the volume of assets and liabilities, not as transactions.

Changes in exchange rates apply only to holdings of securities denominated in foreign currencies.

There is no stated maturity for equity securities.

It should be noted that there are two ways of dealing with a holder’s own shareholdings, as described below in paragraphs 6.56-6.58.

It is very rare for securities to be lost or accidentally destroyed, given that almost all securities are registered electronically.

Changes in financial claims resulting from write-downs that reflect the actual market values of tradable financial claims should be accounted for in the revaluation account.

This spread is a service provided by dealers and paid for by buyers and sellers.

Data that are based on the balance sheets of equity securities’ holders are affected by the accounting standards of the country where the holders reside and their implementation of those standards. This means that those positions do not usually reflect the securities’ market value.

With some exceptions, such as zero-coupon bonds.

A day count convention (or a day count fraction) indicates how accrued interest is compiled between coupon dates. Different rules exist on how to determine the number of days of the ‘accrual’ period divided by the total number of days of the ‘reference’ period (often 360 or 365 days per year).

In the case of discount debt securities, accrued interest is determined by the discount that is distributed over the life of the securities.

For example, a fixed interest rate bond is issued at 100 and pays annual fixed coupons of 10 during its life. Interest accrues of 10, even though no coupon is actually paid. The interest is considered to be reinvested in the bond—increasing its nominal value from 100 to 110. The coupon paid by the debtor at the end of each year is a (partial) redemption of the bond, reducing its nominal value from 110 to 100.

The approaches are also characterized on a “historical/contractual” basis and on a “prevailing market rate” basis.

Dividends are sometimes paid even if a loss is recorded, where it is expected to be temporary.

Bonus shares stemming from the transformation of reserves into nominal (issued) capital may lead to changes in the share price.

The concept of consolidation used in business accounting involves extending the boundary to all subsidiaries, eliminating mutual equity holdings, financial links and other transactions, and applying some specific extra accounting treatments. In the national accounts, consolidation involves only the second step, since the boundary for reporting is defined by the sector, sub-sector, or any other grouping under consideration.

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