Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union Text with EEA relevance

• (b) changes in financial claims resulting from write-offs. These are excluded from the financial account because there is no mutual agreement between the parties. Specifically, a creditor may decide that a financial claim can no longer be collected, for example because of bankruptcy or liquidation, and removes the claim from their balance sheet. The creditor's recognition that the claim is uncollectable 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 of the total economy. An exception to this general principle is made for taxes and social contributions payable to general government (see point (d) of paragraph 6.15);

• (c) changes of life insurance, annuity entitlements and pension entitlements due to changes in demographic assumptions;

• (d) provisions for calls under standardised guarantee schemes when the expected calls exceed the expected receipts and recoveries.

• 6.15Other changes in volume not elsewhere classified exclude:

• (a) changes in financial claims resulting from write-downs that reflect the actual market values of tradable financial claims: these are accounted for in the revaluation account;

• (b) cancellation of debt by mutual agreement between debtor and creditor (debt cancellation or debt forgiveness): this is recorded as a transaction between the creditor and the debtor (see point (f) of paragraph 4.165);

• (c) debt repudiation: the unilateral cancellation of a liability by a debtor is not recognised;

• (d) taxes and social contributions payable to general government that general government unilaterally recognises as unlikely to be collected (see paragraphs 1.57, 4.27 and 4.82).

Changes in classification (K.6)

• 6.16Changes in classification comprise changes in sector classification and institutional unit structure, and changes in classification of assets and liabilities.

Changes in sector classification and institutional unit structure (K.61)

• 6.17Reclassifying an institutional unit from one sector to another transfers its entire balance sheet, e.g. if an institutional unit classified in the households sector becomes financially distinct from its owner, it may qualify as a quasi-corporation and be reclassified in the non-financial corporations sector.

• 6.18Changes in sector classification transfer the entire balance sheet from one sector or subsector to another. The transfer may result in consolidation or deconsolidation of assets and liabilities, which is also included in this category.

• 6.19Changes in structure of institutional units cover appearance and disappearance of certain financial assets and liabilities arising from corporate restructuring. When a corporation disappears as an independent legal entity because it is absorbed by one or more corporations, all financial assets and liabilities, including shares and other equity that existed between that corporation and those that absorbed it, disappear from the system. However, the purchase of shares and other equity of a corporation as part of a merger is recorded as a financial transaction between the purchasing corporation and its previous owners. The replacement of existing shares by shares in the purchasing corporation, or a new corporation, is recorded as redemptions of shares accompanied by the issue of new shares. Financial assets and liabilities that existed between the absorbed corporation and third parties remain unchanged and pass to the absorbing corporation.

• 6.20Symmetrically, when a corporation is legally split up into two or more institutional units, the appearance of financial assets and liabilities is recorded as changes in sector classification and structure.

Changes in classification of assets and liabilities (K.62)

• 6.21Changes in classification of assets and liabilities occur where assets and liabilities appear under one category in the opening balance sheet and another in the closing balance sheet. Examples include changes in land use and conversions of dwellings to commercial use or vice versa. In the case of land, both entries (a negative entry for the old category, a positive one for the new category) are made with the same value. Any change in land value resulting from this change in use is recorded as a volume change rather than a revaluation and, hence, as an economic appearance of assets or economic disappearance of non-produced assets.

• 6.22Appearance or disappearance of monetary gold held in the form of gold bullion cannot be created by a financial transaction but enters or leaves the system through other changes in the volume of assets.

• 6.23A special case of a change in classification occurs for gold bullion. Gold bullion can be a financial asset known as monetary gold, or a valuable known as non-monetary gold, depending on the holder and the motivation for the holding. Monetisation is the change in the classification of gold bullion from non-monetary to monetary. Demonetisation is the change in the classification of gold bullion from monetary to non-monetary.

• 6.24Operations in relation to gold bullion are recorded as follows.

• (a) When a monetary authority sells gold bullion that is a reserve asset to a non-resident institutional unit that is not a monetary authority or to a resident institutional unit, a transaction in non-monetary gold is recorded. Demonetisation of gold as a change in the classification of gold bullion from monetary to non-monetary occurs immediately before the transaction and is recorded as other changes in the volume of assets of the monetary authority.

• (b) When a monetary authority purchases gold bullion from a non-resident or a resident institutional unit for its reserve assets and that gold is not already a reserve asset, a transaction in non-monetary gold is recorded. Monetisation of gold as a change in the classification of gold bullion from non-monetary to monetary occurs immediately after the transaction and is recorded as other changes in the volume of assets of the monetary authority.

• (c) When buyer and seller are monetary authorities of different economies and both hold the gold bullion as part of their reserve assets, there is a transaction in gold bullion, which is recorded in the financial account.

• (d) In other cases, gold bullion is non-monetary at all times and transactions in non-monetary gold are recorded.

• The above cases relating to a monetary authority also apply to an international financial organisation.

• 6.25Changes in classification of assets and liabilities do not include the conversion of debt securities into shares, which is recorded as two financial transactions.

Nominal holding gains and losses (K.7)

• 6.26The revaluation account records the nominal holding gains and losses accruing during an accounting period to the owners of assets and liabilities, reflecting changes in the level and structure of their prices. Nominal holding gains and losses (K.7) comprise neutral holding gains and losses (K.71) and real holding gains and losses (K.72).

• 6.27 Definition: the nominal holding gains and losses (K.7) that relate to an asset are the increases or decreases in the asset's value accruing to its economic owner as a result of increases or decreases in its price. The nominal holding gains and losses that relate to a financial liability are the decreases or increases in the liability's valuation as a result of decreases or increases to its price.

• 6.28A holding gain arises from an increase in the value of an asset or from a decrease in the value of a liability. A holding loss arises from a decrease in the value of an asset or an increase in the value of a liability.

• 6.29The nominal holding gains and losses recorded in the revaluation account are those accruing on assets or liabilities, whether realised or not. A holding gain is said to be realised when the asset in question is sold, redeemed, used or otherwise disposed of, or the liability repaid. An unrealised gain is one accruing on an asset that is still owned or a liability that is still outstanding at the end of the accounting period. A realised gain is usually understood as the gain realised over the entire period over which the asset is owned or liability outstanding whether this period coincides with the accounting period or not. However, as holding gains and losses are recorded on an accruals basis, the distinction between realised and unrealised gains and losses, although useful for some purposes, does not appear in the classifications and accounts.

• 6.30Holding gains and losses include the gains and losses on all kinds of non-financial assets, financial assets and liabilities. Thus, holding gains and losses on inventories of all kinds of goods held by producers, including work-in-progress, are also covered.

• 6.31Nominal holding gains and losses may accrue on assets held or liabilities incurred for any length of time during the accounting period and not merely on assets or liabilities that appear in the opening and/or closing balance sheets. The nominal holding gains and losses accruing to the owner of a particular asset or liability, or given quantity of a specific type of asset or liability, between two points of time is defined as 'the current value of that asset or liability at the later point of time minus the current value of that asset or liability at the earlier point of time', assuming that the asset or liability itself does not change, qualitatively or quantitatively, during that time.

• 6.32The nominal holding gain (G) accruing on a given quantity q of some asset between times o and t can be expressed as follows:

Image omitted; see official source ,

• where po and pt are the prices of the asset at times o and t respectively. For financial assets and liabilities with fixed current values in the national currency, po and pt are unity by definition and the nominal holding gain are always zero.

• 6.33To calculate nominal holding gains and losses, acquisitions and disposals of assets must be valued in the same way they are recorded in the capital and financial accounts and stocks of assets must be valued in the same way they are recorded in the balance sheet. In the case of fixed assets, the value of an acquisition is the amount paid by the purchaser to the producer, or seller, plus the associated costs of ownership transfer incurred by the purchaser. The value of a disposal of an existing fixed asset is the amount received by the seller from the purchaser minus the costs of ownership transfer incurred by the seller.

• 6.34An exception to the case described in paragraph 6.33 is where the price paid differs from the market value of the asset. In this case, a capital transfer is imputed for the difference between the price paid and the market value and the acquisition is recorded at market value. This particularly occurs in transactions involving non-market sectors.

• 6.35Four different situations leading to nominal holding gains and losses are distinguished:

• (a) an asset held throughout the accounting period: the nominal holding gain accruing during the accounting period is equal to the closing balance sheet value minus the opening balance sheet value minus any consumption of fixed capital in the accounting period. These values are the estimated values of the assets if they were to be acquired at the times the balance sheets are drawn up. The nominal gain is unrealised;

• (b) an asset held at the beginning of the period that is sold during the period: the nominal holding gain accruing is equal to the value at disposal minus the opening balance sheet value minus any consumption of fixed capital in the accounting period that occurs prior to the sale. The nominal gain is realised;

• (c) an asset acquired during the period and still held at the end of the period: the nominal holding gain accruing is equal to the closing balance sheet value minus the value at acquisition minus any consumption of fixed capital in the accounting period. The nominal gain is unrealised; and

• (d) an asset acquired and disposed of during the accounting period: the nominal holding gain accruing is equal to the value at disposal minus the value at acquisition minus any consumption of fixed capital in the accounting period between acquisition and disposal. The nominal gain is realised.

• 6.36The nominal holding gains and losses included are those accruing on assets and liabilities, whether realised or not. They are recorded in the revaluation account of the sectors involved, the total economy and the rest of the world.

Neutral holding gains and losses (K.71)

• 6.37 Definition: the neutral holding gains and losses (K.71) relate to assets and liabilities and are the value of the holding gains and losses that accrue if the price of the asset or liability changes over time in the same proportion as the general price level.

• 6.38Neutral holding gains and losses are identified to facilitate the derivation of real holding gains and losses, which redistribute real purchasing power between sectors.

• 6.39Let the general price index be denoted by r. The neutral holding gain (NG) on a given quantity q of an asset between times o and t is then given by the following expression:

Image omitted; see official source ,

• where po × q is the current value of the asset at time o and rt/ro the factor of the change in the general price index between times o and t. The same term rt/ro is applied to all assets and liabilities.

• 6.40The general price index to be applied for the calculation of neutral holding gains and losses is a price index for final expenditure.

• 6.41Neutral holding gains and losses are recorded in the neutral holding gains and losses account, which is a subaccount of the revaluation account of the sectors, the total economy and the rest of the world.

Real holding gains and losses (K.72)

• 6.42 Definition: the real holding gains and losses (K.72) relate to an asset or liability and are the difference between the nominal and the neutral holding gains and losses on that asset.

• 6.43The real holding gain (RG) on a given quantity q of an asset between times o and t is given by:

Image omitted; see official source

or

Image omitted; see official source

.

• 6.44The values of the real holding gains and losses on assets and liabilities thus depend on the movements of their prices over the period in question, relative to movements of other prices, on average, as measured by the general price index.

• 6.45Real holding gains and losses are recorded in the real holding gains and losses account, which is a subaccount of the revaluation account.

Holding gains and losses by types of financial asset and liability

Monetary gold and SDRs (AF.1)

• 6.46As the price of monetary gold is usually quoted in US dollars, the value of monetary gold is subject to nominal holding gains and losses through changes in the exchange rate as well as the price of the gold itself.

• 6.47As the SDRs represent a basket of currencies, its value in national currency terms, and so the value of the holding gains and losses, varies with the exchange rates of the currencies in the basket against the national currency.

Currency and deposits (AF.2)

• 6.48The current values of currency and deposits denominated in national currency remain constant over time. The 'price' of such an asset is always unity while the quantity is given by the number of units of the currency in which they are denominated. The nominal holding gains and losses on such assets are always zero. For this reason, the difference between the values of the opening and closing stocks of such assets is, with the exception of other changes in volume, entirely accounted for by the values of the transactions in the assets. This is a rare case where it is normally possible to deduce the transactions from the changes in balance sheet figures.

• 6.49The interest accruing on deposits is recorded in the financial account as being simultaneously reinvested as deposits.

• 6.50Holdings of foreign currency and deposits denominated in other currencies will register nominal holding gains and losses due to changes in exchange rates.

• 6.51In order to calculate the neutral and real holding gains and losses on assets of fixed current value, data on the times and values of transactions are needed as well as the opening and closing balance sheet values. Suppose, for example, a deposit is made and withdrawn within the accounting period while the general price level is rising. The neutral gain on the deposit is positive and the real gain negative, the amount depending upon the length of time the deposit is outstanding and the rate of inflation. It is impossible to record such real losses without data on the value of the transactions during the accounting period and the times at which they are made.

• 6.52In general, it may be inferred that if the total absolute value of the positive and negative transactions is large in relation to the opening and closing balance sheet levels, approximate estimates of the neutral and real holding gains and losses on financial assets and liabilities with fixed current values derived from balance sheet data alone may not be very satisfactory. Even recording the values of financial transactions on a gross basis, i.e. recording deposits made and withdrawn separately as distinct from the total value of deposits minus withdrawals, may not be sufficient without information on the timing of the deposits.

Debt securities (AF.3)

• 6.53When a long-term debt security, such as a bond, is issued at premium or discount, including deep discounted and zero coupon bonds, the difference between its issue price and its face or redemption value when it matures measures interest that the issuer is obliged to pay over the life of the debt security. Such interest is recorded as property income payable by the issuer of the long-term debt security and receivable by the holder of the debt security, in addition to any coupon interest actually paid by the issuer at specified intervals over the life of the debt security.

• 6.54The interest accruing is recorded in the financial account as being simultaneously reinvested in the debt security by the holder of the debt security. It is therefore recorded in the financial account as the acquisition of an asset, which is added to the existing asset. Thus the gradual increase in the market value of a long-term debt security that is attributable to the accumulation of accrued reinvested interest reflects a growth in the principal outstanding — that is, in the size of the asset. It is essentially a quantum or volume increase and not a price increase. It does not generate any holding gain for the holder of the long-term debt security or a holding loss for the issuer. Debt securities change qualitatively over time as they approach maturity and it is essential to recognise that increases in their values due to the accumulation of accrued interest are not price changes and do not generate holding gains.

• 6.55The prices of fixed-interest long-term debt securities also change, however, when the market rates of interest change, the prices varying inversely with the interest rate movements. The impact of a given interest rate change on the price of an individual long-term debt security is lower the closer the security is to maturity. Changes in prices of long-term debt securities that are attributable to changes in market rates of interest constitute price and not quantum changes. They, therefore, generate nominal holding gains and losses for both the issuers and the holders of the debt securities. An increase in interest rates generates a nominal holding gain for the issuer of the debt security and an equal nominal holding loss for the holder, and vice versa in the case of a fall in interest rates.

• 6.56Variable interest rate debt securities have their coupon or principal payments linked to a general price index for goods and services, such as the consumer price index, an interest rate such as the Euribor, the Libor or a bond yield, or an asset price.

• When the amounts of the coupon payments and/or the principal outstanding are linked to a general or broad price index, the change in the value of the principal outstanding between the beginning and the end of a particular accounting period due to the movement in the relevant index is treated as interest accruing in that period, in addition to any interest due for payment in that period.

• When indexation of the amounts to be paid at maturity includes a holding gain motive, typically indexation based on a single, narrowly defined item, any deviation of the underlying index from the originally expected path leads to holding gains or losses, which will not normally cancel out over the life of the instrument.

• 6.57Nominal holding gains and losses may accrue on short-term debt securities in the same way as for long-term debt securities. However, as short-term debt securities have much shorter times to maturity, the holding gains generated by interest rate changes are generally much smaller than on long-term debt securities with the same face values.

Loans (AF.4)

• 6.58The same situation as for currency and deposits applies for loans that are not traded. However, when an existing loan is sold to another institutional unit, the write-down of the loan, which is the difference between the redemption price and the transaction price, is recorded under the revaluation account of the seller and the purchaser at the time of transaction.

Equity and investment fund shares (AF.5)

• 6.59Bonus shares increase the number of shares and the nominal value of the shares issued but do not by themselves alter the market value of the totality of shares. This also applies for a stock dividend which is a pro-rata distribution of additional shares of a corporation's stock to owners of the common stock. Bonus shares and stock dividends do not enter the accounts at all. However, such issues are designed to improve the liquidity of the shares on the market and hence the total market value of shares issued may rise as a result: any such change is recorded as a nominal holding gain.

Insurance, pension and standardised guarantee schemes (AF.6)

• 6.60When the reserves and entitlements for insurance, pension and standardised guarantee schemes are denominated in national currency, there are no nominal holding gains and losses, just as there are none for currency or deposits and loans. The assets used by the financial institutions to meet the commitments are subject to holding gains and losses.

• 6.61The liabilities to policy holders and beneficiaries change as a result of transactions, other volume changes and revaluations. Revaluations are due to changes of key model assumptions in the actuarial calculations. Those assumptions are the discount rate, the wage rate and the inflation rate.

Financial derivatives and employee stock options (AF.7)

• 6.62The value of financial derivatives may change as a result of changes in the value of the underlying instrument, changes in the volatility of the price of the underlying instrument, or approaching the date of execution or maturity. All such changes in value to financial derivatives and employee stock options are to be regarded as price changes and recorded as a revaluation.

Other accounts receivable/payable (AF.8)

• 6.63The same situation as for domestic currency, deposits and loans applies for other accounts receivable/payable, which are not traded. However, when an existing trade credit is sold to another institutional unit the difference between the redemption price and the transaction price is recorded as revaluation at the time of transaction. Nonetheless, as trade credit generally has a short-term nature, the sale of a trade credit might imply the creation of a new financial instrument.

Assets denominated in foreign currency

• 6.64The value of assets and liabilities denominated in foreign currency is measured by their current market value in foreign currency converted into national currency at the current exchange rate. Nominal holding gains and losses may therefore occur from both changes in the price of the asset and the exchange rate. The total value of the nominal holding gains and losses accruing over the accounting period is calculated by subtracting the value of transactions and other volume changes from the difference between the opening and closing balance sheet values. For this purpose, transactions in assets and liabilities denominated in foreign currency are converted into the national currency using the exchange rates at the time the transactions occur, while the opening and closing balance sheet values are converted using the exchange rates prevailing at the dates to which the balance sheets relate. This implies that the total value of the transactions as net acquisitions — acquisitions less disposals — expressed in foreign currency is, in effect, converted by a weighted average exchange rate in which the weights are given the values of transactions conducted on different dates.

CHAPTER 7

BALANCE SHEETS

• 7.01. Definition: a balance sheet is a statement, drawn up for a particular point in time, of the values of assets economically owned and of liabilities owed by an institutional unit or group of units.

• 7.02The balancing item of a balance sheet is called net worth (B.90). The stock of the assets and liabilities recorded in the balance sheet are valued at the appropriate prices, which are usually the market prices prevailing on the date to which the balance sheet relates, but for some categories at their nominal values. A balance sheet is drawn up for resident institutional sectors and subsectors, the total national economy and the rest of the world.

• 7.03The balance sheet completes the sequence of accounts, showing the ultimate effect of the entries in the production, distribution and use of income, and accumulation accounts on the stock of wealth of an economy.

• 7.04For institutional sectors the balancing item on the balance sheet is net worth.

• 7.05For the total national economy the balancing item is often referred to as national wealth — the total value of non-financial assets, and net financial assets with respect to the rest of the world.

• 7.06The rest of the world balance sheet is compiled in the same manner as the balance sheets of the resident institutional sectors and subsectors. It consists entirely of positions in financial assets and liabilities of non-residents vis-à-vis residents. In the BPM6 the corresponding balance sheet drawn from the viewpoint of residents vis-à-vis non-residents is called the international investment position (IIP).

• 7.07Own funds are defined as the sum of net worth (B.90) plus the value of equity and investment fund shares (AF.5) as liabilities in the balance sheet.

• 7.08For the non-financial corporations and financial corporations sectors and subsectors, own funds is an analytically meaningful indicator similar to net worth.

• 7.09The net worth of corporations will usually be different from the value of their shares and other equity issued. Quasi-corporations' net worth is zero because the value of their owner's equity is assumed to be equal to its assets less its non-equity liabilities. The net worth of resident direct investment enterprises, which are branches of non-resident enterprises and treated as quasi-corporations, is therefore also zero.

• 7.10The balancing item of financial assets and liabilities is called financial net worth (BF.90).

• 7.11A balance sheet relates to the value of assets and liabilities at a particular moment of time. Balance sheets are compiled at the beginning and end of an accounting period; the opening balance sheet at the beginning of the period is the same as the closing balance sheet recorded at the end of the preceding period.

• 7.12A basic accounting identity links the value of the stock of a specific type of an asset as shown in the opening balance sheet and the closing balance sheet as follows:

the value of the stock of a specific type of asset in the opening balance sheet	the value of the stock of a specific type of asset in the opening balance sheet	the value of the stock of a specific type of asset in the opening balance sheet
plus	transactions	the total value of that asset acquired in transactions that take place during the accounting period
minus	transactions	the total value of that asset disposed of in transactions that take place during the accounting period
minus	transactions	consumption of fixed capital (if applicable)
plus	other changes in the volume of assets	other positive changes in volume affecting that asset
minus	other changes in the volume of assets	other negative changes in volume affecting that asset
plus	revaluations	the value of nominal holding gains accruing during the period resulting from changes in the price of that asset
minus	revaluations	the value of nominal holding losses accruing during the period resulting from changes in the price of that asset
equals the value of the stock of that asset in the closing balance sheet.	equals the value of the stock of that asset in the closing balance sheet.	equals the value of the stock of that asset in the closing balance sheet.

• A table can also be drawn up, which links the value of the stock of a specific type of a liability in the opening balance sheet and the closing balance sheet.

• 7.13The accounting links between the opening balance sheet and the closing balance sheet via transactions, other changes in the volume of assets and liabilities, and holding gains and losses are shown schematically in Annex 7.2.

TYPES OF ASSETS AND LIABILITIES

Definition of an asset

• 7.14The assets recorded in the balance sheets are economic assets.

• 7.15 Definition: an economic asset is a store of value representing the benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of carrying forward value from one accounting period to another.

• 7.16The economic benefits consist of primary incomes such as operating surplus, where the economic owner uses the asset, or property income, where the economic owner lets others use it. The benefits are derived from the use of the asset and the value, including holding gains and losses, that is realised by disposing of the asset or terminating it.

• 7.17The economic owner of an asset is not necessarily the legal owner. The economic owner is the institutional unit entitled to claim the benefits associated with the use of the asset by virtue of accepting the associated risks.

• 7.18An overview of the classification and coverage of economic assets is given in Table 7.1. The detailed definition of each asset category is set out in Annex 7.1.

EXCLUSIONS FROM THE ASSET AND LIABILITY BOUNDARY

• 7.19Excluded from the asset and liability boundary are:

• (a) human capital;

• (b) natural assets that are not considered as economic assets (e.g. air, river water);

• (c) consumer durables; and

• (d) contingent assets and liabilities, which are not financial assets and liabilities (see paragraph 7.31).

CATEGORIES OF ASSETS AND LIABILITIES

• 7.20Two main categories of entries in the balance sheets are distinguished: non-financial assets (denoted as AN) and financial assets and liabilities (denoted as AF).

• 7.21Non-financial assets are divided into produced non-financial assets (denoted as AN.1) and non-produced non-financial assets (denoted as AN.2).

Produced non-financial assets (AN.1)

• 7.22 Definition: produced non-financial assets (AN.1) are outputs from production processes.

• 7.23The classification of produced non-financial assets (AN.1) is designed to distinguish among assets on the basis of their role in production. It consists of: fixed assets which are used repeatedly or continuously in production for more than one year; inventories which are used up in production as intermediate consumption, sold or otherwise disposed of; and valuables. Valuables are not used primarily for production or consumption, but are instead acquired and held primarily as stores of value.

Non-produced non-financial assets (AN.2)

• 7.24 Definition: non-produced non-financial assets (AN.2) are economic assets that come into existence other than through processes of production. They consist of natural assets, contracts, leases, licences, permits, and goodwill and marketing assets.

• 7.25The classification of non-produced assets is designed to distinguish assets on the basis of how they come into existence. Some of these assets exist naturally, while others, which are known as constructs of society, come into existence by legal or accounting actions.

• 7.26The choice of which natural assets to include in the balance sheet is determined, in compliance with the general definition of an economic asset, by whether the assets are subject to effective economic ownership and are capable of bringing economic benefits to their owners, given the existing technology, knowledge, economic opportunities, available resources, and set of relative prices. Natural assets where ownership rights have not been established, such as open seas or air, are excluded.

• 7.27Contracts, leases, licences and permits are regarded as non-financial assets only when a legal agreement confers economic benefits on the holder in excess of amounts payable under the agreement, and the holder can legally and practically realise such benefits by transferring them to others.

Financial assets and liabilities (AF)

• 7.28 Definition: financial assets (AF) are economic assets, comprising all financial claims, equity and the gold bullion component of monetary gold (paragraph 5.03). Liabilities are established when debtors are obliged to provide a payment or a series of payments to creditors (paragraph 5.06).

• 7.29Financial assets are stores of value representing a benefit or series of benefits accruing to the economic owner through holding or using the assets over a period of time. They are a means of carrying forward value from one accounting period to another. Benefits are exchanged through means of payments (paragraph 5.04).

• 7.30Each financial asset has a counterpart liability, with the exception of the gold bullion component of monetary gold, which is classified in the monetary gold and special drawing rights (AF.1) category.

• 7.31Contingent assets and contingent liabilities are agreements whereby one party is obliged to provide a payment or series of payments to another unit only if certain specific conditions prevail (paragraph 5.08). They are not financial assets and liabilities.

• 7.32The classification of financial assets and liabilities corresponds to the classification of financial transactions (paragraph 5.14). The definitions of the categories and subcategories of financial assets and liabilities and the supplementary explanations are provided in Chapter 5 and not repeated here but Annex 7.1 contains a summary of all assets and liabilities defined in the system.

Table 7.1 —  Classification of assets

AN.	NON-FINANCIAL ASSETS (AN.1 + AN.2)
AN.1	Produced non-financial assets
AN.11	Fixed assets [^E0008]
AN.111	Dwellings
AN.112	Other buildings and structures
AN.1121	Buildings other than dwellings
AN.1122	Other structures
AN.1123	Land improvements
AN.113	Machinery and equipment
AN.1131	Transport equipment
AN.1132	ICT equipment
AN.1139	Other machinery and equipment
AN.114	Weapons systems
AN.115	Cultivated biological resources
AN.1151	Animal resources yielding repeat products
AN.1152	Tree, crop and plant resources yielding repeat products
AN.117	Intellectual property products
AN.1171	Research and development
AN.1172	Mineral exploration and evaluation
AN.1173	Computer software and databases
AN.11731	Computer software
AN.11732	Databases
AN.1174	Entertainment, literary or artistic originals
AN.1179	Other intellectual property products
AN.12	Inventories
AN.121	Materials and supplies
AN.122	Work-in-progress
AN.1221	Work-in-progress on cultivated biological assets
AN.1222	Other work-in-progress
AN.123	Finished goods
AN.124	Military inventories
AN.125	Goods for resale
AN.13	Valuables
AN.131	Precious metals and stones
AN.132	Antiques and other art objects
AN.133	Other valuables
AN.2	Non-produced non-financial assets
AN.21	Natural resources
AN.211	Land
AN.2111	Land underlying buildings and structures
AN.2112	Land under cultivation
AN.2113	Recreational land and associated surface water
AN.2119	Other land and associated surface water
AN.212	Mineral and energy reserves
AN.213	Non-cultivated biological resources
AN.214	Water resources
AN.215	Other natural resources
AN.2151	Radio spectra
AN.2159	Other
AN.22	Contracts, leases and licences
AN.221	Marketable operating leases
AN.222	Permits to use natural resources
AN.223	Permits to undertake specific activities
AN.224	Entitlement to future goods and services on an exclusive basis
AN.23	Purchases less sales of goodwill and marketing assets

Memorandum item AN.m: consumer durables.

AF	FINANCIAL ASSETS [^E0009] (AF.1 + AF.2 + AF.3 + AF.4 + AF.5 + AF.6 + AF.7 + AF.8)
AF.1	Monetary gold and special drawing rights (SDRs)
AF.11	Monetary gold
AF.12	Special drawing rights (SDRs)
AF.2	Currency and deposits
AF.21	Currency
AF.22	Transferable deposits
AF.29	Other deposits
AF.3	Debt securities
AF.31	Short-term
AF.32	Long-term
AF.4	Loans
AF.41	Short-term
AF.42	Long-term
AF.5	Equity and investment fund shares or units
AF.51	Equity
AF.511	Listed shares
AF.512	Unlisted shares
AF.519	Other equity
AF.52	Investment fund shares or units
AF.521	MMF shares/units
AF.522	Non-MMF investment fund shares/units
AF.6	Insurance, pension and standardised guarantee schemes
AF.61	Non-life insurance technical reserves
AF.62	Life insurance and annuity entitlements
AF.63	Pension entitlements
AF.64	Claims of pension funds on pension managers
AF.65	Entitlements to non-pension benefits
AF.66	Provisions for calls under standardised guarantees
AF.7	Financial derivatives and employee stock options
AF.71	Financial derivatives
AF.72	Employee stock options
AF.8	Other accounts receivable/payable
AF.81	Trade credits and advances
AF.89	Other accounts receivable/payable, excluding trade credit and advances

Memorandum items AF.m1: foreign direct investment; AF.m2: non-performing loans.

VALUATION OF ENTRIES IN THE BALANCE SHEETS

General valuation principles

• 7.33Each item in the balance sheet is valued as if it were being acquired on the date to which the balance sheet relates. Assets and liabilities are valued at market prices on the date to which the balance sheet relates.

• 7.34The values recorded should reflect prices observable on the market on the date to which the balance sheet relates. When there are no observable market prices, which may be the case if there is a market but no assets have recently been sold on it, estimates should be made of what the price would be if the assets were acquired on the market on the date to which the balance sheet relates.

• 7.35Market prices are usually available for many financial assets and liabilities, existing real estate (buildings and other structures plus the underlying land), existing transport equipment, crops and livestock, as well as for newly produced fixed assets and inventories.

• 7.36Non-financial assets produced on own-account should be valued at basic prices or, if basic prices are not available, at the basic prices of similar goods, or, if this is not possible, at cost.

• 7.37In addition to observed market prices, estimates based on observed prices or costs incurred, values of non-financial assets may be estimated by:

• (a) revaluing and accumulating acquisitions less disposals over the assets' lifetimes; or

• (b) the present value, i.e. the discounted value, of future economic benefits.

• 7.38Market valuation is the key principle for valuing positions (and transactions) in financial instruments. Financial instruments are identical to financial claims. They are financial assets that have corresponding liabilities. The market value is that at which financial assets are acquired or disposed of, between willing parties, on the basis of commercial considerations only, excluding commissions, fees and taxes. In determining market values, trading parties also take account of accrued interest.

• 7.39Nominal valuation reflects the sum of funds originally advanced, plus any subsequent advances, less any repayments, plus any accrued interest. Nominal value is not the same as face value.

• (a) The nominal value in domestic currency of a financial instrument denominated in foreign currency includes holdings gains or losses arising from movements in exchange rates. The value of financial instruments denominated in foreign currency should be converted into the national currency at the market exchange rate prevailing on the date to which the balance sheet relates. This rate should be the mid-point between the buying and the selling spot rates for currency transactions.

• (b) For financial instruments like debt securities linked to a narrow index, the nominal value can also include holding gains or losses arising from movements in the index.

• (c) At any specific point in time, the market value of a financial instrument may deviate from its nominal value due to revaluations arising from market price changes. Movements in market prices arise from general market conditions, such as changes in the market rate of interest, specific circumstances, such as changes in the perceived creditworthiness of the issuer of a debt security, and changes in general market liquidity and in market liquidity that is specific to that debt security.

• (d) Thus, the following basic equation applies to positions: market value = nominal value + revaluations arising from market price changes.

• 7.40For some non-financial assets, the revalued initial acquisition price reduces to zero over the asset's expected life. The value of such an asset, at any particular point of time, is given by its current acquisition price less the accumulated value of such reductions.

• 7.41Most fixed assets can be recorded in balance sheets at current purchasers' prices reduced for the accumulated consumption of fixed capital; this is known as the written-down replacement cost. The sum of the reduced values of all fixed assets still in use is described as the net capital stock. The gross capital stock includes the values of the accumulated consumption of fixed capital.

NON-FINANCIAL ASSETS (AN)

Produced non-financial assets (AN.1)

Fixed assets (AN.11)

• 7.42Fixed assets are recorded at market prices if possible (or basic prices in the case of own-account production of new assets) or, if not possible, then at purchasers' prices at acquisition reduced by the accumulated consumption of fixed capital. The purchasers' costs of transferring ownership of fixed assets, appropriately reduced through consumption of fixed capital over the period the purchaser expects to hold the economic asset, are included in the balance sheet value.

Intellectual property products (AN.117)

• 7.43Mineral exploration and evaluation (category AN.1172) are valued either on the basis of the accumulated amounts paid to other institutional units conducting the exploration and evaluation, or on the basis of the costs incurred for exploration undertaken on own-account. That part of exploration undertaken in the past that has not yet been fully reduced should be revalued at the prices and costs of the current period.

• 7.44Originals of intellectual property products, such as computer software and entertainment, literary or artistic originals should be valued at the acquisition price when traded on markets. The initial value is estimated by summing their costs of production, appropriately revalued to the prices of the current period. If it is not possible to establish the value by this method, the present value of expected future receipts arising from using the asset is estimated.

Costs of ownership transfer on non-produced assets (AN.116)

• 7.45The costs of ownership transfer on non-produced assets other than land are shown separately in the capital account, and treated as gross fixed capital formation, but in the balance sheets such costs are incorporated in the value of the asset to which they relate even though the asset is non-produced. Thus, there are no costs of ownership transfer shown separately in the balance sheets. The costs of ownership transfer on financial assets are treated as intermediate consumption, where the assets are acquired by corporations or government, final consumption where the assets are acquired by households and exports of services where the assets are acquired by non-residents.

Inventories (AN.12)

• 7.46Inventories should be valued at prices prevailing on the date to which the balance sheet relates, and not at the prices at which the products were valued when they entered inventory.

• 7.47Inventories of materials and supplies are valued at purchasers' prices, and inventories of finished goods and work-in-progress are valued at basic prices. Inventories of goods intended for resale without further processing by distributors are valued at the prices prevailing on the date to which the balance sheet relates, excluding any transportation costs incurred by the wholesalers or retailers. For inventories of work-in-progress, the value of the closing balance sheet is estimated by applying the fraction of the total production cost incurred by the end of the period to the basic price of a similar finished product on the date to which the balance sheet relates. If the basic price of the finished products is unavailable, it is estimated by the value of the production cost with a mark-up for expected net operating surplus or estimated net mixed income.

• 7.48Single-use crops (except timber) under cultivation and livestock raised for slaughter can be valued by reference to the prices of such products on the markets. Standing timber is valued by discounting the future proceeds of selling the timber at current prices after deducting the expenses of bringing the timber to maturity, felling, etc.

Valuables (AN.13)

• 7.49Valuables such as works of art, antiques, jewellery, precious stones, non-monetary gold and other metals are valued at current prices. If organised markets exist for these assets, they should be valued at the actual or estimated prices they would fetch, excluding any agents' fees or commissions, if sold on the market on the date to which the balance sheet relates. Otherwise, they should be valued at acquisition prices, revalued to the current price level.

Non-produced non-financial assets (AN.2)

Natural resources (AN.21)

Land (AN.211)

• 7.50In the balance sheet land is valued at its current market price. Any expenditure on land improvements is recorded as gross fixed capital formation and the additional value it provides is excluded from the value of land shown in the balance sheet and is instead shown in a separate asset category for land improvement (AN.1123).

• 7.51Land is valued at the estimated price achieved if sold on the market, excluding the costs involved in transferring ownership for a future sale. When a transfer does occur, it is recorded by convention as gross fixed capital formation and the costs are excluded from the AN.211 land value recorded in the balance sheet and instead recorded as an AN.1123 asset. This is reduced to zero through consumption of fixed capital over the period that the new owner expects to use the land.

• 7.52If the value of the land cannot be separated from that of buildings or other structures situated on it, the combined assets are classified together in the category of the asset that has the greater value.

Mineral and energy reserves (AN.212)

• 7.53Reserves of mineral deposits located on or below the earth's surface, that are economically exploitable given current technology and relative prices, are valued at the present value of expected net returns resulting from their commercial exploitation of the assets.

Other natural assets (AN.213, AN.214 and AN.215)

• 7.54Observed market prices for non-cultivated biological resources (AN.213), water resources (AN.214) and other natural resources (AN.215) are unlikely to be available, so they are usually valued at the present value of future returns expected from them.

Contracts, leases and licences (AN.22)

• 7.55 Definition: contracts, leases and licences are recorded as assets when the following conditions are met:

• (a) the terms of the contract, lease or licence specify a price for the use of an asset or provision of a service that differs from the prevailing market price; and

• (b) one party to the contract can realise the price difference.

• The contracts, leases and licences can be valued by taking market information from the transfers of the instruments conferring the rights, or estimated as the present value of expected future returns at the balance sheet date compared to the situation when the legal agreement starts.

• 7.56The category covers assets that may arise from marketable operating leases, licences to use natural resources, permits to undertake specific activities and entitlements to future goods and services on an exclusive basis.

• 7.57The value of the asset is equal to the net present value of the excess of the prevailing price over that fixed in the agreement. Other things being equal, this will decline as the period of the agreement expires. Changes in the value of the asset due to changes in the prevailing price are recorded as nominal holding gains and losses.

• 7.58Marketable operating lease assets are only recorded as assets when lessees exercise their rights to realise the price difference.

Purchases less sales of goodwill and marketing assets (AN.23)

• 7.59The balance sheet value of goodwill and marketing assets is the excess of the price paid at the time an institutional unit is sold, over the value recorded for its own funds, revalued for any subsequent reductions as the initial value is written down as an economic disappearance of non-produced assets (K.2). The rate of write down is in accordance with commercial accounting standards.

• 7.60Marketing assets consist of items such as brand names, mastheads, trademarks, logos and domain names.

FINANCIAL ASSETS AND LIABILITIES (AF)

• 7.61Financial assets and liabilities as negotiable financial instruments such as debt securities, equity securities, investment fund shares or units and financial derivatives, are valued at market value. Financial instruments that are non-negotiable are valued at nominal value (see paragraphs 7.38 and 7.39). The counterpart financial assets and liabilities have the same values in the balance sheet. The values should exclude commissions, fees and taxes. Commissions, fees and taxes are recorded as services provided in carrying out the transactions.

Monetary gold and SDRs (AF.1)

• 7.62Monetary gold (AF.11) is to be valued at the price established in organised gold markets.

• 7.63The value of SDRs (AF.12) is determined daily by the IMF and the rates against domestic currencies are obtainable from foreign exchange markets.

Currency and deposits (AF.2)

• 7.64For currency (banknotes and coins — AF.21), the valuation is the nominal value of the currency.

• 7.65For deposits (AF.22, AF.29), the values recorded in the balance sheet are nominal values.

• 7.66Currency and deposits in foreign currency are converted to domestic currency at the mid-point of the bid and offer spot exchange rates prevailing on the balance sheet date.

Debt securities (AF.3)

• 7.67Debt securities are recorded at market value.

• 7.68Short-term debt securities (AF.31) are valued at market value. If market values are not available then, provided there are no conditions of high inflation or high nominal interest rates, the market value can be approximated by the nominal value for:

• (a) short-term debt securities issued at par; and

• (b) short-term discounted debt securities.

• 7.69Long-term debt securities (AF.32) are valued at market value, whether they are bonds on which interest is paid regularly or deep-discounted or zero-coupon bonds on which little or no interest is paid.

Loans (AF.4)

• 7.70The values to be recorded in the balance sheets of both creditors and debtors are the nominal values irrespective of whether the loans are performing or non-performing.

Equity and investment fund shares/units (AF.5)

• 7.71Listed shares (AF.511) are valued at their market values. The same value is adopted for both the asset side and the liability side, although shares and other equity are not, legally, a liability of the issuer, but an ownership right to a share in the liquidation value of a corporation, where the liquidation value is not known in advance.

• 7.72Listed shares are valued at a representative mid-market price observed on the stock exchange or other organised financial markets.

• 7.73The values of unlisted shares (AF.512), which are not traded on organised markets, should be estimated with reference to either:

• (a) the values of quoted shares where appropriate;

• (b) the value of own funds; or

• (c) discounting forecast profits by applying an appropriate market price to earnings ratio to the smoothed recent earnings of the institutional unit.

• However, these estimates will take into account differences between listed and unlisted shares, notably their liquidity and consider the net worth accumulated over the life of the corporation and its branch of business.

• 7.74The estimation method applied depends on the basic statistics available. It may take into account, for example, data on merger activities involving unlisted shares. If the value of unlisted corporations' own funds moves similarly, on average and in proportion to their nominal capital, to that of similar corporations with listed shares, then the balance sheet value can be calculated using a ratio. This ratio compares the value of own funds of unlisted corporations to that of listed corporations:

• value of unlisted shares = market price of similar listed shares × (own funds of unlisted corporations)/(own funds of similar listed corporations).

• 7.75The ratio of share price to own funds may vary with the branch of business. It is preferable to calculate the current price of unlisted shares branch by branch. There may be other differences between listed and unlisted corporations, which can have an effect on the estimation method.

• 7.76Other equity (AF.519) is equity that is not in the form of securities. It can include equity in quasi-corporations (such as branches, trusts, limited liability and other partnerships), public corporations, unincorporated funds and notional units (including notional resident units created to reflect non-resident ownership of real estate and natural resources). The ownership of international organisations not in the form of shares is classified as other equity.

• 7.77Quasi-corporations' other equity is valued according to their own funds, since their net worth is by convention equal to zero. For other units the most appropriate valuation method from the methods used for unlisted shares should be taken.

• 7.78Corporations that issue shares or units may additionally have other equity.

• 7.79Investment fund shares or units (AF.52) are valued at market price if they are listed. If unlisted the market value may be estimated as described for unlisted shares. If they are redeemable by the fund itself they are valued at their redemption value.

Insurance, pension and standardised guarantee schemes (AF.6)

• 7.80The amounts recorded for non-life insurance technical reserves (AF.61) cover premiums paid but not earned plus the amounts set aside to meet outstanding claims. The latter represent the present value of amounts expected to be paid out in settlement of claims, including disputed claims and an allowance for claims to cover incidents that have occurred but not yet been reported.

• 7.81The amounts recorded for life insurance and annuity entitlements (AF.62) represent the reserves needed to meet all expected future claims.

• 7.82The amounts recorded for pension entitlements (AF.63) depend on the type of pension scheme.

• 7.83In a defined benefit pension scheme the level of pension benefits promised to participating employees is determined by a formula agreed in advance. The liability of a defined benefit pension scheme is equal to the present value of the promised benefits.

• 7.84In a defined contribution scheme the benefits paid are dependent on the performance of the assets acquired by the pension scheme. The liability of a defined contribution scheme is the current market value of the funds' assets. The funds' net worth is always zero.

• 7.85The value recorded for provisions for calls under standardised guarantees (AF.66) is the expected level of claims less the value of any expected recoveries.

Financial derivatives and employee stock options (AF.7)

• 7.86Financial derivatives (AF.71) should be included in the balance sheets at their market value. If market price data are unavailable, for example in the case of over the counter options they should be valued at either the amount required to buy out or to offset the contract or the amount of premium payable.

• 7.87For options, the writer of the option is considered to have incurred a counterpart liability representing the cost of buying out the rights of the option holder.

• 7.88The market value of forwards can switch between positive (asset) and negative (liability) positions depending on price movements in the underlying items and thus they can switch being assets and liabilities for the writers and holders. Some forwards operate on margin payments, where profits or losses are settled daily; in these cases the balance sheet value will be zero.

• 7.89Employee stock options (AF.72) are valued by reference to the fair value of the equity granted. The fair value is measured at grant date using the market value of equivalent traded options or, if unavailable, using an option pricing model.

Other accounts receivable/payable (AF.8)

• 7.90Trade credits and advances (AF.81) and other accounts receivable/payable excluding trade credits and advances (AF.89), which arise due to timing differences between distributive transactions, such as taxes, social contributions, dividends, rents, wages and salaries, and financial transactions, are valued, for both creditors and debtors, at nominal value. Any amounts of taxes and social contributions payable under AF.89 should exclude the amounts unlikely to be collected since they represent a government claim with no value.

FINANCIAL BALANCE SHEETS

• 7.91The financial balance sheet shows, on its left side, financial assets and, on its right side, liabilities. The balancing item of the financial balance sheet is financial net worth (BF.90).

• 7.92The financial balance sheet of a resident sector or a subsector may be consolidated or non-consolidated. The non-consolidated financial balance sheet shows all the financial assets and liabilities of the institutional units classified in the sector or subsector, including those where the corresponding asset or liability is held within that sector or subsector. The consolidated financial balance sheet eliminates the financial assets and liabilities that have counterparts in the same sector or subsector. The financial balance sheet of the rest of the world is consolidated by definition. As a rule, the accounting entries in the System are not consolidated. Therefore, the financial balance sheet of a resident sector or subsector is to be presented on a non-consolidated basis.

• 7.93The from-whom-to-whom financial balance sheet (the balance sheet by debtor/creditor) is an extension of the financial balance sheet, showing in addition a breakdown of financial assets by debtor sector and a breakdown of liabilities by creditor sector. Therefore, it provides information on debtor/creditor relationships and is consistent with the financial account by debtor/creditor.

MEMORANDUM ITEMS

• 7.94In order to show items of more specialised analytic interest for particular sectors, three types of memorandum items are included as supporting items to the balance sheets:

• (a) consumer durables (AN.m);

• (b) foreign direct investment (AF.m1);

• (c) non-performing loans (AF.m2).

Consumer durables (AN.m)

• 7.95 Definition: consumer durables are durable goods used by households repeatedly over periods of time of more than one year for final consumption. They are included in the balance sheets as memorandum items. They are excluded from the main balance sheet because they are recorded as uses in the households sector's use of income account as being consumed in the period of account, and not gradually used up.

• 7.96The stocks of consumer durables held by households as final consumers — transport equipment (AN.1131) and other machinery and equipment (AN.1139) — are valued at market prices in the memorandum item, net of the equivalent accumulated charges for consumption of fixed capital. A full list of the subgroups and items of consumer durables is given in Chapter 23.

• 7.97Durable goods, such as vehicles, are classified as either fixed assets or as consumer durables depending on the sector classification of the owner and the purpose for which they are used. For example, a vehicle may be used partly by a quasi-corporation for production and partly by a household for final consumption. The values shown in the balance sheet for the non-financial corporations sector (S.11) should reflect the proportion of the use that is attributable to the quasi-corporation. A similar example exists for employers (including own-account workers) subsector (S.141 + S.142). The proportion attributed to the households sector (S.14) as final consumers should be recorded in the memorandum item, net of the equivalent accumulated charges for consumption of fixed capital.

Foreign direct investment (AF.m1)

• 7.98Financial assets and liabilities that constitute direct investment are recorded according to the nature of the investment in the categories loans (AF.4), equity and investment fund shares/units (AF.5) or other accounts receivable/payable (AF.8). The amount of direct investment included within each of these categories is recorded as a separate memorandum item.

Non-performing loans (AF.m2)

• 7.99Loans are recorded in the balance sheet at nominal value.

• 7.100Certain loans that have not been serviced for some time are included as a memorandum item to the balance sheet of the creditor. Such loans are termed non-performing loans.

• 7.101 Definition: a loan is non-performing when (a) payments of interest or principal are 90 days or more past their due date; (b) interest payable of 90 days or more has been capitalised, refinanced, or delayed by agreement; or (c) payments are less than 90 days overdue, but there are other good reasons (such as a debtor filing for bankruptcy) to doubt that payments will be made in full.

• 7.102This definition of a non-performing loan is to be interpreted taking into account national conventions on when a loan is deemed to be non-performing. Once a loan is classified as non-performing, it (or any replacement loans) should remain classified as such until payments are received or the principal is written off on this or subsequent loans that replace the original.

• 7.103Two memorandum items are required for non-performing loans:

• (a) the nominal value of such loans, as recorded in the main balance sheet; and

• (b) the market equivalent value of such loans.

• 7.104The closest approximation to market equivalent value is fair value, which is 'the value that approximates to the value that would arise from a market transaction between two parties'. Fair value can be established using transactions in comparable instruments, or using the discounted present value of cash flows; which may be available from the balance sheet of the creditor. In the absence of fair value data, the memorandum item will have to use a second-best approach and show nominal value less expected loan losses.

Recording of non-performing loans

• 7.105The non-performing loans of the general government and financial corporations sectors must be recorded as memorandum items, along with other sectors that have significant amounts. If significant, the loans to or from the rest of the world, are also recorded as memorandum items.

• 7.106The following table describes the positions and flows that are recorded for non-performing loans to show a more complete picture on stocks, transactions, reclassifications and write-offs.

• 7.107The example shows an outstanding amount of loans at nominal value of 1 000 at t-1, of which 500 are performing and 500 are non-performing. The majority of the non-performing loans, 400, is covered by loan loss provisions, while 100 are not. The second part of the table provides detailed supplementary information on the market equivalent value of the non-performing loans. It is derived as the difference between the nominal value and the loan loss provisions. At t-1, it is assumed to be 375. During the period from t-1 to t, parts of the loans are reclassified from performing or not yet covered to non-performing or vice versa, or written off. The flows are shown in the corresponding columns of the table. For the loan loss provisions the nominal values and the market equivalent values are also presented.

• 7.108The assessments on loan loss provisions have to be made in the framework of the accounting standards, the legal status and the taxation rules applicable to the units, which might lead to rather heterogeneous results in terms of amounts and duration of loan loss provisions. This makes it difficult to record non-performing loans in the main accounts and leads to their recording as a memorandum item. It is preferable instead to provide market equivalent values as memorandum items in addition to the nominal values of loans, performing and non-performing.

Recording of non-performing loans

Positions	Stock	Transaction	Reclassification	Write-off	Stock
Positions	t-1	period t-1 to t	period t-1 to t	period t-1 to t	t
Positions	Nominal value	Nominal value	Nominal value	Nominal value	Nominal value	Nominal value
Positions	Loans	1 000	200	0	– 90	1 110
Performing loans	500	200	– 50		650
Non-performing loans	500		50	– 90	460
Covered by loan loss provisions	400		70	– 90	380
Not yet covered by loan loss provisions	100		– 20		80
Market equivalent value	Market equivalent value	Market equivalent value	Market equivalent value	Market equivalent value	Market equivalent value
Non-performing loans	375		24	– 51	348
= Nominal value	500		50	– 90	460
– Loan loss provisions	125		26	– 39	112
o/w not yet covered	100		– 20		80

ANNEX 7.1

SUMMARY OF EACH ASSET CATEGORY