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

Feature	Securities lending	Securities lending	Repurchase agreements	Repurchase agreements
Feature	Cash collateral	Without cash collateral	Specific securities	General collateral
Formal method of exchange	Lending of securities with an agreement by the borrower to deliver it back to the lender	Lending of securities with an agreement by the borrower to deliver it back to the lender	Sale of securities and commitment to repurchase them under terms of master agreement	Sale of securities and commitment to repurchase them under terms of master agreement
Form of exchange	Securities versus cash	Securities versus other collateral (if any)	Securities versus cash	Cash versus securities
Return is paid to the supplier of	Cash collateral (the securities borrower)	Securities (not collateral securities) (the securities lender)	Cash	Cash
Return repayable as	Fee	Fee	Repo rate	Repo rate

• 5.129The securities provided under securities lending and repurchase agreements are treated as not having changed economic ownership because the lender is still the beneficiary of the income yield by the security, and subject to the risks or benefits of any change in the price of the security.

• 5.130Neither the supply and receipt of funds under a securities repurchase agreement, nor securities lending with cash collateral, involve any new issuance of debt securities. Such provision of funds to institutional units other than monetary financial institutions is treated as loans; for deposit taking corporations, it is treated as deposits.

• 5.131If a securities lending does not involve the supply of cash, that is, if there is an exchange of one security for another, or if one party supplies a security without collateral, there is no transaction in loans, deposits or securities.

• 5.132Marginal calls in cash under a repo are classified as loans.

• 5.133Gold swaps are similar to securities repurchase agreements except that the collateral is gold. They involve an exchange of gold for foreign exchange deposits with an agreement that the transaction be reversed at an agreed future date at an agreed gold price. The transaction is recorded as a collateralised loan or a deposit.

Financial leases

• 5.134 Definition: a financial lease is a contract under which the lessor as legal owner of an asset conveys the risks and benefits of ownership of the asset to the lessee. Under a financial lease, the lessor is deemed to make, to the lessee, a loan with which the lessee acquires the asset. Thereafter the leased asset is shown on the balance sheet of the lessee and not the lessor; the corresponding loan is shown as an asset of the lessor and a liability of the lessee.

• 5.135Financial leases may be distinguished from other kinds of leases because the risks and rewards of ownership are transferred from the legal owner of the good to the user of the good. Other kinds of leases are (i) operating lease; and (ii) resource lease. Contracts, leases and licenses, as defined in Chapter 15, can be considered as leases as well.

Other types of loans

• 5.136The loans category includes the following:

• (a) overdrafts on transferable deposit accounts, where the amount overdrawn is not treated as a negative transferable deposit;

• (b) overdrafts on other current accounts, for example, intra-group balances between non-financial corporations and their subsidiaries, but excluding balances which are liabilities of monetary financial institutions classified in the deposit sub-categories;

• (c) financial claims of employees because of participation in the corporation's profit;

• (d) repayable margin payments related to financial derivatives which are liabilities of institutional units other than monetary financial institutions;

• (e) loans which are counterparts of bankers' acceptances;

• (f) mortgage loans;

• (g) consumer credit;

• (h) revolving credits;

• (i) instalment loans;

• (j) loans paid as a guarantee for fulfilling certain obligations;

• (k) deposit guarantees as financial claims of reinsurance corporations on ceding corporations;

• (l) financial claims on the IMF evidenced by loans in the General Resources Account, including lending under the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB); and

• (m) liabilities to the IMF evidenced by IMF credit or Poverty Reduction and Growth Facility (PRGF) loans.

• 5.137The special case of non-performing loans is discussed in Chapter 7.

Financial assets excluded from the category of loans

• 5.138The category of loans does not include:

• (a) other accounts receivable/payable (AF.8), including trade credits and advances (AF.81); and

• (b) financial assets or liabilities arising from the ownership of immovable assets, such as land and structures, by non-residents. They are classified in other equity (AF.519).

Equity and investment fund shares or units (F.5)

• 5.139 Definition: equity and investment fund shares or units are residual claims on the assets of the institutional units that issued the shares or units.

• 5.140Equity and investment fund shares are divided into two subcategories:

• (a) equity (F.51); and

• (b) investment fund shares or units (F.52).

Equity (F.51)

• 5.141 Definition: equity is a financial asset that is a claim on the residual value of a corporation, after all other claims have been met.

• 5.142Ownership of equity in legal entities is usually evidenced by shares, stocks, depository receipts, participations, or similar documents. Shares and stocks have the same meaning.

Depository receipts

• 5.143 Definition: depository receipts represent ownership of securities listed in other economies; ownership of the depository receipts is treated as direct ownership of the underlying securities. A depository issues receipts listed on one exchange that represent ownership of securities listed on another exchange. Depository receipts facilitate transactions in securities in economies other than their home listing. The underlying securities may be shares or debt securities.

• 5.144Equity is subcategorised into the following:

• (a) listed shares (F.511);

• (b) unlisted shares (F.512); and

• (c) other equity (F.519).

• 5.145Both listed shares and unlisted shares are negotiable, and described as equity securities.

Listed shares (F.511)

• 5.146 Definition: listed shares are equity securities listed on an exchange. Such an exchange may be a recognised stock exchange or any other form of secondary market. Listed shares are also referred to as quoted shares. The existence of quoted prices of shares listed on an exchange means that current market prices are usually readily available.

Unlisted shares (F.512)

• 5.147 Definition: unlisted shares are equity securities not listed on an exchange.

• 5.148Equity securities include shares issued by unlisted limited liability companies as follows:

• (a) capital shares which give the holders the status of joint owners and entitle them to a share in the total distributed profits and to a share in the net assets in the event of liquidation;

• (b) redeemed shares whose capital has been repaid but which are retained by holders who continue to be joint owners and to be entitled to a share in the profits left after dividends have been paid on the remaining registered capital and also to a share in any surplus which may be left on liquidation, i.e. the net assets less the remaining registered capital;

• (c) dividend shares, also called founders' shares, profits shares, and dividend shares, which are not part of the registered capital. Dividend shares do not give holders the status of joint owners — holders therefore do not have the right to a share in the repayment of the registered capital, the right to a return on this capital, the right to vote at shareholders' meetings, etc. Nevertheless, they entitle the holders to a proportion of any profits remaining after dividends have been paid on the registered capital and to a fraction of any surplus remaining on liquidation;

• (d) Participating preference shares or stocks, which entitle holders to participate in the distribution of the residual value of a corporation on dissolution. The holders have also the right to participate in, or receive, additional dividends over and above the fixed percentage dividend. The additional dividends are usually paid in proportion to any ordinary dividends declared. In the event of liquidation, participating preference shareholders have the right to a share of any remaining proceeds that ordinary shareholders receive, and receive back what they paid for their shares.

Initial public offering, listing, de-listing, and share buy back

• 5.149An initial public offering (IPO), also referred to simply as an 'offering' or a 'flotation', is when a corporation issues equity securities to the public for the first time. Such equity securities are often issued by smaller, younger corporations for financing reasons, or by large enterprises to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting entity, which helps to determine what type of equity security to issue, the best offering price and time to bring it to market.

• 5.150Listing refers to the corporation's shares being on the list of stocks that are officially traded on a stock exchange. Normally, the issuing corporation is the one that applies for a listing but in some countries the exchange can list a corporation, for instance because its stock is already being actively traded via informal channels. Initial listing requirements usually include a history of a few years of financial statements; a sufficient size of the amount being placed among the general public, both in absolute terms and as a percentage of the total outstanding stock; and an approved prospectus, usually including opinions from independent assessors. De-listing refers to the practice of removing the shares of a corporation from a stock exchange. This occurs when a corporation goes out of business, declares bankruptcy, no longer satisfies the listing rules of a stock exchange, or has become a quasi-corporation or unincorporated business, often as a result of a merger or acquisition. Listing is recorded as an issuance of listed shares, and as a redemption of unlisted shares, while de-listing is recorded as a redemption of listed shares, and an issuance of unlisted shares where appropriate.

• 5.151Corporations may buy back their own equity in a share repurchase, also known as a stock repurchase or a share buyback. A share buyback is recorded as a financial transaction, providing cash to the existing shareholders in exchange for a part of the corporation's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding. The corporation either retires the shares or keeps them as a 'treasury stock', available for reissuance.

Financial assets excluded from equity securities

• 5.152Equity securities do not include:

• (a) shares offered for sale but not taken up on issue. They are not recorded;

• (b) debentures and loan stock convertible into shares. They are classified as debt securities (AF.3) up to the time when they are converted;

• (c) the equity of partners with unlimited liability in incorporated partnerships. They are classified as other equity;

• (d) government investments in the capital of international organisations which are legally constituted as corporations with share capital. They are classified as other equity (AF.519);

• (e) issues of bonus shares i.e. the issue without payment of new shares to shareholders in proportion to their holdings. Such an issue, which changes neither the liability of the corporation vis-à-vis the shareholders nor the proportion of the assets that each shareholder holds in the corporation, does not constitute a financial transaction. Share split issues are also not recorded.

Other equity (F.519)

• 5.153 Definition: other equity comprises all forms of equity other than those classified in sub-categories listed shares (AF.511) and unlisted shares (AF.512).

• 5.154Other equity includes:

• (a) all forms of equity in corporations which are not shares, including the following:
• (1) the equity in incorporated partnerships subscribed by unlimited partners;
• (2) the equity in limited liability companies whose owners are partners and not shareholders;
• (3) the capital invested in ordinary or limited partnerships recognised as independent legal entities;
• (4) the capital invested in cooperative societies recognised as independent legal entities;

• (b) investment by general government in the capital of public corporations whose capital is not divided into shares and which by virtue of special legislation are recognised as independent legal entities;

• (c) investment by general government in the capital of the central bank;

• (d) government investments in the capital of international and supranational organisations, with the exception of the IMF, even if these are legally constituted as corporations with share capital (e.g. the European Investment Bank);

• (e) the financial resources of the ECB contributed by the national central banks;

• (f) capital invested in financial and non-financial quasi-corporations. The amount of such investments corresponds to new investments in cash or kind, less any capital withdrawals;

• (g) the financial claims that non-resident units have against notional resident units and vice versa.

Valuation of transactions in equity

• 5.155New shares are recorded at issue value, which is nominal value plus the issue premium.

• 5.156Transactions in shares in circulation are recorded at their transaction value. When the transaction value is not known, it is approximated by the stock exchange quotation or market price for listed shares and by the market-equivalent value for unlisted shares.

• 5.157Scrip dividend shares are shares valued at the price implied by the issuer's dividend proposal.

• 5.158Issues of bonus shares are not recorded. However, in cases where the issue of bonus shares involves changes in the total market value of the shares of a corporation, the changes in market value are recorded in the revaluation account.

• 5.159The transaction value of equity (F.51) is the amount of funds transferred by the owners to corporations or quasi-corporations. In some cases, funds can be transferred by assuming liabilities of the corporation or quasi-corporation.

Investment fund shares or units (F.52)

• 5.160 Definition: investment fund shares are shares of an investment fund if the fund has a corporate structure. They are known as units if the fund is a trust. Investment funds are collective investment undertakings through which investors pool funds for investment in financial and/or non-financial assets.

• 5.161Investment funds are also called mutual funds, unit trusts, investment trusts, and undertakings for collective investments in transferable securities (UCITS); they may be open-ended, semi-open or closed-end funds.

• 5.162Investment fund shares may be listed or unlisted. When they are unlisted, they are usually repayable on request, at a value corresponding to their share in the own funds of the financial corporation. These own funds are revalued regularly on the basis of the market prices of their various components.

• 5.163Investment fund shares are subdivided into:

Money market fund (MMF) shares or units (F.521); and

Non-MMF investment fund shares /units (F.522).

MMF shares or units (F.521)

• 5.164 Definition: MMF shares or units are shares issued by MMFs. MMF shares or units can be transferable and are often regarded as close substitutes for deposits.

Non-MMF investment fund shares/units (F.522)

• 5.165 Definition: other investment fund shares or units other than MMF shares or units represent a claim on a portion of the value of an investment fund other than an MMF. These types of shares and units are issued by investment funds.

• 5.166Other unlisted investment fund shares or units other than MMF shares or units are usually repayable on request, at a value corresponding to their share in the own funds of the financial corporation. Such own funds are revalued regularly on the basis of the market prices of their various components.

Valuation of transactions in investment fund shares or units

• 5.167Transactions in investment fund shares or units include the value of net contributions to a fund.

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

• 5.168Insurance, pension and standardised guarantee schemes are divided into six subcategories:

• (a) non-life insurance technical reserves (F.61);

• (b) life insurance and annuity entitlements (F.62);

• (c) pension entitlements (F.63);

• (d) claims of pension funds on pension managers (F.64);

• (e) entitlements to non-pension benefits (F.65); and

• (f) provisions for calls under standardised guarantees (F.66).

Non-life insurance technical reserves (F.61)

• 5.169 Definition: non-life insurance technical reserves are financial claims that non-life insurance policy holders have against non-life insurance corporations in respect of unearned premiums and claims incurred.

• 5.170Transactions in non-life insurance technical reserves for unearned premiums and claims incurred relate to risks like accidents, sickness, or fire, and also to reinsurance.

• 5.171Unearned premiums are premiums paid but not yet earned. Premiums are usually paid at the beginning of the period covered by the policy. On an accrual basis, the premiums are earned throughout the policy period, so that the initial payment involves a prepayment or advance.

• 5.172Claims outstanding are claims due but not yet settled, including cases where the amount is in dispute or the event leading to the claim has occurred but has not yet been reported. Claims due but not yet settled correspond to the reserves against outstanding insurance claims, which are amounts identified by insurance corporations to cover what they expect to pay out arising from events that have occurred but for which the claims are not yet settled.

• 5.173Other technical reserves, such as equalisation reserves, may be identified by insurers. However, these are only recognised as liabilities and corresponding assets when there is an event giving rise to a liability. Otherwise, equalisation reserves are internal accounting entries by the insurer representing saving to cover irregularly occurring events, and do not represent existing claims of policy holders.

Life insurance and annuity entitlements (F.62)

• 5.174 Definition: life insurance and annuity entitlements consist of financial claims that life insurance policy holders and beneficiaries of annuities have against corporations providing life insurance.

• 5.175Life insurance and annuity entitlements are used to provide benefits to policy holders upon the expiry of the policy, or to compensate beneficiaries upon the death of policyholders, so they are kept separate from shareholders' funds. Reserves in the form of annuities are based on the actuarial calculation of the present value of the obligations to pay future income until the death of the beneficiaries.

• 5.176Transactions in life insurance and annuity entitlements consist of additions less reductions.

• 5.177Additions in terms of financial transactions consist of:

• (a) actual premiums earned during the current accounting period; and

• (b) premium supplements, corresponding to the income from the investment of the entitlements attributed to the policy holders after deduction of service charges.

• 5.178Reductions consist of:

• (a) amounts due to holders of endowment and similar insurance policies; and

• (b) payments due on policies that are surrendered before maturity.

• 5.179In the case of a group insurance taken out by a corporation on behalf of its employees, the employees, but not the employer, are the beneficiaries since they are considered to be the policy holders.

Pension entitlements (F.63)

• 5.180 Definition: pension entitlements comprise financial claims that current employees and former employees hold against either:

• (a) their employers;

• (b) a scheme designated by the employer to pay pensions as part of a compensation agreement between the employer and the employee; or

• (c) an insurer.

• 5.181Transactions in pension entitlements consist of additions less reductions, which are to be distinguished from nominal holding gains or losses on the funds invested by pension funds.

• 5.182Additions in terms of financial transactions consist of:

• (a) actual contributions to pension schemes payable by employees, employers, self-employed persons or other institutional units on behalf of individuals or households with claims on the scheme, and earned during the current accounting period; and

• (b) contribution supplements corresponding to the income earned from the investment of the pension entitlements of the pension scheme attributed to participating households, after deduction of service charges during the period for managing the scheme.

• 5.183Reductions consist of:

• (a) social benefits equal to the amounts payable to retired persons or their dependants in the form of regular payments or other benefits; and

• (b) social benefits which consist of any lump sums payable to persons when they retire.

Contingent pension entitlements

• 5.184The pension entitlements category does not include contingent pension entitlements established by institutional units classified as unfunded government defined benefit employer pension schemes or as social security pension funds. Their transactions are not fully recorded and their other flows and stocks are not recorded in the core accounts, but in the supplementary table on accrued-to-date pension entitlements in social insurance. Contingent pension entitlements are not liabilities of the central government, state government, local government or social security funds subsectors and are not financial assets of the prospective beneficiaries.

Claims of pension funds on pension managers (F.64)

• 5.185An employer may contract with a third party to look after the pension funds for his employees. If the employer continues to determine the terms of the pension schemes and retains the responsibility for any deficit in funding as well as the right to retain any excess funding, the employer is described as the pension manager and the unit working under the direction of the pension manger is described as the pension administrator. If the agreement between the employer and the third party is such that the employer passes the risks and responsibilities for any deficit in funding to the third part in return for the right of the third party to retain any excess, the third party becomes the pension manager as well as the administrator.

• 5.186When the pension manager is a unit different from the administrator and the amount accruing to the pension fund falls below the increase in entitlements, a claim of the pension fund on the pension manager is recorded. Where the amount accruing to the pension fund exceeds the increase in entitlements, there is an amount payable by the pension fund to the pension manager.

Entitlements to non-pension benefits (F.65)

• 5.187The excess of net contributions over benefits represents an increase in the liability of the insurance scheme towards the beneficiaries. This item is shown as an adjustment in the use of income account. As an increase in a liability, it is also shown in the financial account. This item is likely to occur only rarely and, for pragmatic reasons, changes in such non-pension entitlements may be included with those for pensions.

Provisions for calls under standardised guarantees (F.66)

• 5.188 Definition: provisions for calls under standardised guarantees are financial claims that holders of standardised guarantees have against institutional units providing them.

• 5.189Provisions relating to calls under standardised guarantees are prepayments of net fees and provisions to meet outstanding calls under standardised guarantees. Like provisions for prepaid insurance premiums and reserves, provisions for calls under standardised guarantees include unearned fees (premiums) and calls (claims) not yet settled.

• 5.190Standardised guarantees are guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines. Such arrangements involve three parties: the borrower, the lender and the guarantor. Either the borrower or the lender may contract with the guarantor to repay the lender if the borrower defaults. Examples are export credit guarantees and student loan guarantees.

• 5.191Although it is not possible to establish the likelihood of any particular borrower defaulting, it is usual to estimate how many out of a batch of similar borrowers will default. Much like a non-life insurer, a guarantor working on commercial lines will expect all the fees paid, plus the property income earned on the fees and any reserves, to cover the expected defaults and associated costs and leave a profit. Accordingly a similar treatment to that of non-life insurance is adopted for such guarantees, described as standardised guarantees.

• 5.192Standardised guarantees cover guarantees on various financial instruments like deposits, debt securities, loans and trade credit. They are usually provided by a financial corporation, including but not confined to insurance corporations, but also by general government.

• 5.193When an institutional unit offers standardised guarantees, it charges fees and incurs liabilities to meet the call on the guarantee. The value of the liabilities in the accounts of the guarantor is equal to the present value of the expected calls under existing guarantees, net of any recoveries the guarantor expects to receive from the defaulting borrowers. The liability is called provisions for calls under standardised guarantees.

• 5.194A guarantee may cover a multi-year period. A fee may be payable annually or up-front. In principle, the fee represents charges earned in each year the guarantee holds, with the liability decreasing as the period gets shorter (assuming that the borrower repays in instalments). Thus recording follows that of annuities with the fee paid as the future liability decreases.

• 5.195The nature of a standardised guarantee scheme is that there are many guarantees of the same type, though not all for exactly the same time period nor all starting and finishing on the same dates.

• 5.196Net fees are calculated as fees receivable plus fee supplements (equal to the property income attributed to the unit paying the fee for the guarantee) less administration, etc. costs. Such net fees may be payable by any sector of the economy and are receivable by the sector in which the guarantor is classified. Calls under standardised guarantee schemes are payable by the guarantor and receivable by the lender of the financial instrument under guarantee, regardless of whether the fee was paid by the lender or the borrower. Financial transactions refer to the difference between the payment of fees for new guarantees and calls made under existing guarantees.

Standardised guarantees and one-off guarantees

• 5.197Standardised guarantees are distinguished from one-off guarantees according to two criteria:

• (a) standardised guarantees are characterised by often repeated transactions with similar features and pooling of risks; and

• (b) guarantors are able to estimate the average loss based on available statistics.

• One-off guarantees are individual, and guarantors are not able to make a reliable estimate of the risk of calls. The granting of a one-off guarantee is a contingency and not recorded. Exceptions are certain guarantees provided by government and described in Chapter 20.

Financial derivatives and employee stock options (F.7)

• 5.198Financial derivatives and employee stock options are divided into two subcategories:

• (a) financial derivatives (F.71); and

• (b) employee stock options (F.72).

Financial derivatives (F.71)

• 5.199 Definition: financial derivatives are financial instruments linked to a specified financial instrument or indicator or commodity, through which specific financial risks can be traded in financial markets in their own right. Financial derivatives meet the following conditions:

• (a) they are linked to a financial or non-financial asset, to a group of assets, or to an index;

• (b) they are either negotiable or can be offset on the market; and

• (c) no principal amount is advanced to be repaid.

• 5.200Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, speculation and compensation of employees. Financial derivatives enable parties to trade specific financial risks such as interest rate risk, currency, equity and commodity price risk and credit risk, to other entities which are willing to take these risks, usually without trading in a primary asset. Accordingly, financial derivatives are referred to as secondary assets.

• 5.201The value of a financial derivative derives from the price of the underlying asset: the reference price. The reference price may relate to a financial or non-financial asset, an interest rate, an exchange rate, another derivative or a spread between two prices. The derivative contract may also refer to an index, a basket of prices or other items like emissions trading or weather conditions.

• 5.202Financial derivatives can be categorised by instrument such as options, forwards and credit derivatives, or by market risk as currency swaps, interest rate swaps, etc.

Options

• 5.203 Definition: options are contracts which give the holder of the option the right, but not the obligation, to purchase from or sell to the issuer of the option an asset at a predetermined price within a given time span or on a given date.

• The right to purchase is known as a call option, and the right to sell is known as a put option.

• 5.204The purchaser of the option pays a premium (the option price) for the commitment of the option writer to sell or purchase the specified amount of the underlying asset at the agreed price. The premium is a financial asset of the option holder and a liability of the option writer. The premium can be conceptually considered to include a service charge, which is to be recorded separately. However, in the absence of detailed data, assumptions should be avoided as much as possible when identifying the service element.

• 5.205Warrants are a form of options. They give the holder the right but not the obligation to purchase from the issuer of the warrant a certain number of shares or bonds under specified conditions for a specified period of time. There are also currency warrants based on the amount of one currency required to purchase another and cross-currency warrants tied to third currencies as well as index-, basket- and commodity-warrants.

• 5.206The warrant may be detachable and traded separately from the debt security. As a result, two separate financial instruments are recorded in principle, the warrant as a financial derivative and the bond as a debt security. Warrants with embedded derivatives are classified according to their primary characteristics.

Forwards

• 5.207 Definition: forwards are financial contracts under which two parties agree to exchange a specified quantity of an underlying asset at an agreed price (the strike price) on a specified date.

• 5.208Futures are forward contracts traded on organised exchanges. Futures and other forward contracts are typically, but not always, settled by the payment of cash or the provision of some other financial asset rather than the delivery of the underlying asset, and, therefore, are valued and traded separately from the underlying item. Common forward-type contracts include swaps and forward rate agreements (FRAs).

Options vis-à-vis forwards

• 5.209Options can be contrasted with forwards in that:

• (a) at inception, there is usually no up-front payment for a forward contract and the derivative contract begins with zero value; in the case of an option, a premium is paid when the contract is taken out, and at inception the contract is valued at the amount of the premium;

• (b) as market prices, interest rates or exchange rates change during the life of a forward contract, the contract may take on a positive value for one party (as an asset) and a corresponding negative value (as a liability) for the other. Such positions may switch between the parties, depending on market developments in the underlying asset in relation to the strike price in the contract. This characteristic makes it impractical to identify transactions in assets separately from transactions in liabilities. Unlike other financial instruments, transactions in forwards are therefore normally reported net over assets and liabilities. In the case of an option, the buyer is always the creditor and the writer always the debtor;

• (c) at maturity, redemption is unconditional for a forward, whereas for an option it is determined by the buyer of the option. Some options are redeemed automatically when they are positive at maturity.

Swaps

• 5.210 Definition: swaps are contractual arrangements between two parties who agree to exchange, over time and according to predetermined rules, streams of payment on an agreed notional amount of principal. The most common types are interest rate swaps, foreign exchange swaps and currency swaps.

• 5.211Interest rate swaps are an exchange of interest payments of different character on a notional amount of principal, which is never exchanged. Examples of the types of interest rate swapped are fixed rate, floating rate and rates denominated in a currency. Settlements are often made through net cash payments amounting to the current difference between the two interest rates stipulated in the contract applied to the agreed notional principal.

• 5.212Foreign exchange swaps are transactions in foreign currencies at a rate of exchange stated in the contract.

• 5.213Currency swaps involve an exchange of cash flows related to interest payments and an exchange of principal amounts at an agreed exchange rate at the end of the contract.

Forward rate agreements (FRAs)

• 5.214 Definition: FRAs are contractual arrangements in which two parties, to protect themselves against interest rate changes, agree on an amount of interest to be paid, at a specified settlement date, on a notional amount of principal that is never exchanged. FRAs are settled by net cash payments in a similar way as interest rate swaps. The payments are related to the difference between the forward rate agreement rate and the prevailing market rate at the time of settlement.

Credit derivatives

• 5.215 Definition: credit derivatives are financial derivatives the primary purpose of which is to trade credit risk.

• Credit derivatives are designed for trading in loan and security default risk. Credit derivatives may take the form of forward-type or option-type contracts and, like other financial derivatives, are frequently drawn up under standard legal agreements which facilitate market valuation. Credit risk is transferred from the risk seller, who is buying protection, to the risk buyer, who is selling protection, in exchange for a premium.

• 5.216The risk buyer pays cash to the risk seller in the event of a default. A credit derivative may also be settled by the delivery of debt securities through the unit that has defaulted.

• 5.217Types of credit derivatives are credit default options, credit default swaps (CDS) and total return swaps. A CDS index as a traded credit derivative index reflects the development of CDS premiums.

Credit default swaps

• 5.218 Definition: credit default swaps (CDS) are credit insurance contracts. They are intended to cover losses to the creditor (buyer of a CDS) when:

• (a) a credit event occurs in relation to a reference unit, rather than being associated to a particular debt security or loan. A credit event affecting the reference unit of concern may be a default, but also a failure to make a payment on any (qualifying) liability that has become due as in cases such as debt restructuring, breach of covenants, and others;

• (b) a particular debt instrument, typically a debt security or a loan, goes into default. As with swap contracts, the buyer of the CDS, (regarded as the risk seller), makes a series of premium payments to the seller of the CDS (regarded as the risk buyer).

• 5.219Where there is no default on the associated unit or the debt instrument, the risk seller continues paying premiums until the end of the contract. If there is a default, the risk buyer compensates the risk seller for the loss, and the risk seller ceases to pay premiums.

Financial instruments not included in financial derivatives

• 5.220Financial derivatives do not include:

• (a) the underlying instrument upon which the financial derivative is based;

• (b) structured debt securities that combine a debt security, or a basket of debt securities, with a financial derivative or a basket of financial derivatives, where the derivatives are inseparable from the debt security and the principal initially invested is large compared to the prospective returns from the embedded financial derivatives. Financial instruments where small principal amounts are invested relative to the prospective returns, and which are fully at risk, are classified as financial derivatives. Financial instruments where the debt security component and the financial derivative component are separable from each other are classified accordingly;

• (c) repayable margin payments related to financial derivatives are classified in other deposits or loans depending on the institutional units involved. However, non-repayable margin payments, reducing or eliminating the asset/liability positions which may emerge during the life of the contract, are treated as settlements under the contract, and classified as transactions in financial derivatives;

• (d) secondary instruments, which are not negotiable and cannot be offset on the market; and

• (e) gold swaps, which have the same nature as securities repurchase agreements.

Employee stock options (F.72)

• 5.221 Definition: employee stock options are agreements made on a given date under which an employee has the right to purchase a given number of shares of the employer's stock at a stated price either at a stated time or within a period of time immediately following the vesting date.

• The following terminology is used:

the date of the agreement is the 'grant date';

the purchase price agreed is the 'strike price';

the agreed first date of purchase is the 'vesting date';

the period after the vesting date in which the purchase can be made is the 'exercise period'.

• 5.222Transactions in employee stock options are recorded in the financial account as the counterpart to the element of compensation of employees represented by the value of the stock option. The value of the option is spread over the period between the grant date and vesting date; if the detailed data are lacking, they are to be recorded at the vesting date. Thereafter, transactions are recorded at exercise date or, if they are tradable and are actually traded, between the vesting date and the end of the exercise period.

Valuation of transactions in financial derivatives and employee stock options

• 5.223Secondary trade in options and closing out options prior to delivery involve financial transactions. If an option proceeds to delivery, it may be exercised or not exercised. In cases where the option is exercised, there may be a payment from the option writer to the option holder equal to the difference between the prevailing market price of the underlying asset and the strike price, or, alternatively, there may be an acquisition or sale of the underlying financial or non-financial asset recorded at the prevailing market price and a counterpart payment between the option holder and the option writer equal to the strike price. The difference between the prevailing market price of the underlying asset and the strike price is in both cases equal to the liquidation value of the option, which is the option price on the terminal date. In cases where the option is not exercised, no transaction takes place. However, the option writer makes a holding gain and the option holder makes a holding loss (in both cases equal to the premium paid when the contract was taken out) to be recorded in the revaluation account.

• 5.224The transactions recorded for financial derivatives include any trading in the contracts as well as the net value of settlements made. There may also be the need to record transactions associated with the establishment of derivative contracts. However, in many cases, the two parties will enter into a derivative contract without any payment by one party to the other; in such cases the value of the transaction establishing the contract is nil and nothing is recorded in the financial account.

• 5.225Any explicit commissions paid or received from brokers or intermediaries for arranging options, futures, swaps, and other derivatives contracts are treated as payments for services in the appropriate accounts. The parties to a swap are not considered to be providing a service to each other, but any payment to a third party for arranging the swap is treated as payment for a service. Under a swap arrangement, where principal amounts are exchanged the corresponding flows are to be recorded as transactions in the underlying instrument; streams of other payments are to be recorded under the financial derivatives and employee stock options (F.7) category. While the premium paid to the seller of an option can conceptually be considered to include a service charge, in practice it is usually not possible to distinguish the service element. Therefore, the full price is to be recorded as acquisition of a financial asset by the buyer and as incurrence of a liability by the seller.

• 5.226Where contracts do not involve an exchange of principal, no transaction is recorded at inception. In both cases, implicitly, a financial derivative with a zero initial value is created at that point. Subsequently, the value of a swap will be equal to one of the following:

• (a) for principal amounts, the current market value of the difference between the expected future market values of the amounts to be re-exchanged and the amounts specified in the contract; and

• (b) for other payments, the current market value of the future streams specified in the contract.

• 5.227Changes in the value of the financial derivative over time are recorded in the revaluation account.

• 5.228Subsequent re-exchanges of principal will be governed by the terms and conditions of the swap contract and may imply financial assets being exchanged at a price different from the prevailing market price of such assets. The counterpart payment between the parties to the swap contract will be that specified within the contract. The difference between the market price and the contract price is then equal to the liquidation value of the asset/liability as it applies on the due date and is recorded as a transaction in financial derivatives and employee stock options (F.7). In total, transactions in financial derivatives and employee stock options must match the total revaluation gain or loss throughout the duration of the swap contract. This treatment is analogous to that set out with respect to options, which proceed to delivery.

• 5.229For an institutional unit, a swap or a forward rate agreement is recorded under the item financial derivatives and employee stock options on the assets side where it has a net asset value. Where the swap has a net liability value, it is also recorded on the asset side by convention to avoid flipping between the asset and the liability side. Accordingly, negative net payments increase the net value.

Other accounts receivable/payable (F.8)

• 5.230 Definition: other accounts receivable/payable are financial assets and liabilities created as counterparts to transactions where there is a timing difference between these transactions and the corresponding payments.

• 5.231Other accounts receivable/payable include transactions in financial claims which stem from the early or late payment for transactions in goods or services, distributive transactions or financial transactions on the secondary market.

• 5.232Financial transactions in other accounts receivable/payable comprise:

• (a) Trade credits and advances (F.81); and

• (b) Other accounts receivable/payable, excluding trade credits and advances (F.89).

Trade credits and advances (F.81)

• 5.233 Definition: trade credits and advances are financial claims arising from the direct extension of credit by the suppliers of goods and services to their customers, and advances for work that is in progress or is yet to be undertaken, in the form of prepayment by customers for goods and services not yet provided.

• 5.234Trade credits and advances arise when payment for goods or services is not made at the same time as the change in ownership of a good or provision of a service. If a payment is made prior to the change of ownership, there is an advance.

• 5.235FISIM accrued but not yet paid is included with the corresponding financial instrument and prepayment of insurance premiums is included in insurance technical reserves (F.61); in neither case is there an entry in trade credits and advances.

• 5.236The trade credits and advances subcategory includes:

• (a) financial claims relating to the delivery of goods or services where payment has not taken place;

• (b) trade credits accepted by factoring corporations except when regarded as a loan;

• (c) rental of buildings accruing over time; and

• (d) arrears concerning the payment of goods and services, when not evidenced by a loan.

• 5.237Trade credits are to be distinguished from trade finance in the form of trade bills, and credit provided by third parties to finance trade.

• 5.238Trade credits and advances do not include loans to finance trade credits. They are classified in loans.

• 5.239Trade credits and advances may be divided by original maturity into short-term and long-term trade credits and advances.

Other accounts receivable/payable, excluding trade credits and advances (F.89)

• 5.240 Definition: other accounts receivable/payable are financial claims arising from timing differences between distributive transactions or financial transactions on the secondary market and the corresponding payments.

• 5.241Other accounts receivable/payable include financial claims created as a result of the timing difference between accrued transactions and payments made in respect of, for example:

• (a) wages and salaries;

• (b) taxes and social contributions;

• (c) dividends;

• (d) rent; and

• (e) purchase and sale of securities.

• 5.242Interest accrued and arrears are recorded with the financial asset or liability on which they accrue, and not as other accounts receivable/payable. If the interest accrued is not recorded as being reinvested in the financial asset, it is classified in other accounts receivable/payable.

• 5.243For securities lending and gold loan fees, which are treated as interest, the corresponding entries are included under other accounts receivable/payable, rather than with the instrument to which they relate.

• 5.244Other accounts receivable/payable do not include:

• (a) statistical discrepancies other than timing differences between transactions in goods and services, distributive transactions or financial transactions and the corresponding payments;

• (b) early or late payment in the creation of financial assets or the redemption of liabilities other than those classified in other accounts receivable/payable. These early or late payments are classified in the relevant instrument category;

• (c) the amounts of taxes and social contributions payable to the general government to be included under other accounts receivable/payable omits that part of these taxes and social contributions which is unlikely to be collected, and which therefore represents a general government claim of no value.

ANNEX 5.1

CLASSIFICATION OF FINANCIAL TRANSACTIONS

• 5.A1.01Financial transactions may be classified according to different criteria: by type of financial instrument, negotiability, type of income, maturity, currency and type of interest.

Classification of financial transactions by category

• 5.A1.02Financial transactions are classified in categories and subcategories as shown in Table 5.3. This classification of the transactions in financial assets and liabilities corresponds to the classification of financial assets and liabilities.

Table 5.3 —  Classification of financial transactions

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

• 5.A1.03The classification of financial transactions and of financial assets and liabilities is based primarily on the liquidity, the negotiability and the legal characteristics of the financial instruments. The definitions of the categories are in general independent of the classification of institutional units. The classification of financial assets and liabilities can be further detailed by a cross-classification by institutional unit. An example is the cross-classification of transferable deposits between deposit taking corporations, other than the central bank, as inter-bank positions.

Classification of financial transactions by negotiability

• 5.A1.04Financial claims can be distinguished by whether they are negotiable or not. A claim is negotiable if its ownership is readily capable of being transferred from one unit to another by delivery or endorsement or of being offset in the case financial derivatives. While any financial instrument can be potentially traded, negotiable instruments are designed to be traded on an organised exchange or 'over-the-counter', although actual trading is not a necessary condition for negotiability. Necessary conditions of negotiability are:

• (a) transferability or offsetability in the case of financial derivatives;

• (b) standardisation often evidenced by fungibility and eligibility of an ISIN code; and

• (c) that the holder of an asset does not retain the right of recourse against the previous holders.

• 5.A1.05Securities, financial derivatives and employee stock options (AF.7) are negotiable financial claims. Securities include debt securities (AF.3), listed shares (AF.511), unlisted shares (AF.512), and investment fund shares (AF.52). Financial derivatives and employee stock options are not classified as securities even if they are negotiable financial instruments. They are linked to specific financial or non-financial assets or indices through which financial risks can be traded in financial markets in their own right.

• 5.A1.06Monetary gold and SDRs (AF.1), currency and deposits (AF.2), loans (AF.4), other equity (AF.519), insurance, pension and standardised guarantee schemes (AF.6) and other accounts receivable/payable (AF.8) are not negotiable.

Structured securities

• 5.A1.07Structured securities typically combine a security, or a basket of securities, with a financial derivative, or a basket of financial derivatives. Financial instruments which are not structured securities are, for instance, structured deposits which combine characteristics of deposits and of financial derivatives. While debt securities typically involve payment at inception of a principal to be repaid, financial derivatives do not.

Classification of financial transactions by type of income

• 5.A1.08Financial transactions are classified by the type of income they generate. The linking of income with the corresponding financial assets and liabilities facilitates calculation of rates of return. Table 5.4 shows the detailed classification by transaction and by income type. While monetary gold and SDRs, deposits, debt securities, loans and other accounts receivable/payable accrue interest, equity pays predominantly dividends, reinvested earnings or withdrawals from income of quasi-corporations. Investment income is attributable to holders of investment fund shares and of insurance technical reserves. The remuneration related to the participation in a financial derivative is not recorded as income, because no principal amount is provided.

Table 5.4 —  Classification of financial transactions by type of income

Financial transactions	Code	Type of income	Code
Monetary gold and special drawing rights (SDRs)	F.1	Interest	D.41
Currency	F.21	None
Transferable deposits	F.22	Interest	D.41
Other deposits	F.29	Interest	D.41
Debt securities	F.3	Interest	D.41
Loans	F.4	Interest	D.41
Equity	F.51	Distributed income of corporations	D.42
Equity	F.51	Reinvested earnings	D.43
Listed and unlisted shares	F.511	Dividends	D.421
Listed and unlisted shares	F.512	Reinvested earnings	D.43
Other equity	F.519	Withdrawals from income of quasi-corporations	D.422
Other equity	F.519	Reinvested earnings	D.43
Other equity	F.519	Dividends	D.421
Investment fund shares or units	F.52	Investment income attributable to investment fund shareholders	D.443
Insurance, pension and standardised guarantee schemes	F.6	Investment income attributable to insurance policy holders	D.441
Insurance, pension and standardised guarantee schemes	F.6	Investment income payable on pension entitlements	D.442
Financial derivatives and employee stock options	F.7	None
Other accounts receivable/payable	F.8	Interest	D.41

Classification of financial transactions by type of interest rate

• 5.A1.09Financial assets and liabilities accruing interest may be broken down by the type of interest rate namely fixed, variable, or mixed interest rates.

• 5.A1.10For financial instruments with a fixed interest rate the contractual nominal interest payments are fixed in terms of the currency of denomination for the life of the financial instrument or for a certain number of years. At the date of inception, from the debtor's perspective, the timing and value of interest payments and principal repayments are known.

• 5.A1.11For financial instruments with a variable interest rate, interest and principal payments are linked to an interest rate, general price index for goods and services or asset price. The reference value fluctuates in response to market conditions.

• 5.A1.12Mixed interest rate financial instruments have both a fixed and a variable interest rate over their life and are classified as variable interest rate financial instruments.

Classification of financial transactions by maturity

• 5.A1.13For the analysis of interest rates, asset yields, liquidity or debt servicing capacity, a breakdown of financial assets and liabilities by a range of maturities may be required.

Short-term and long-term maturity

• 5.A1.14 Definition: a financial asset or liability with short-term maturity is repayable on demand at the request of the creditor, or in one year or less. A financial asset or liability with long-term maturity is repayable at some date beyond one year, or has no stated maturity.

Original maturity and remaining maturity

• 5.A1.15 Definition: the original maturity of financial assets or liabilities is defined as the period from the issue date until the final scheduled payment date. A remaining maturity of financial assets or of liabilities is defined as the period from the reference date until the date of the final scheduled payment.

• 5.A1.16The original maturity concept is helpful in understanding debt issuance activity. Therefore, debt securities and loans are split by original maturity into short-term and long-term debt securities and loans.

• 5.A1.17Remaining maturity is more relevant to analysis of debt positions and debt servicing capabilities.

Classification of financial transactions by currency

• 5.A1.18Many of the categories, subcategories and sub-positions of the financial assets and liabilities may be broken down by the currency in which they are denominated.

• 5.A1.19Financial assets or liabilities in foreign currency include financial assets or liabilities denominated in a currency basket, for example SDRs and financial assets or liabilities denominated in gold. A distinction between national currency and foreign currencies is particularly useful for currency and deposits (AF.2), debt securities (AF.3) and loans (AF.4).

• 5.A1.20The currency of settlement may be different from the currency of denomination. The currency of settlement refers to the currency into which the value of positions and flows of financial instruments such as securities are converted each time settlement occurs.

Measures of money

• 5.A1.21Monetary policy analysis may require measures of money such as M1, M2 and M3 to be identified in the financial account. Measures of money are not defined in the ESA 2010.

CHAPTER 6

OTHER FLOWS

INTRODUCTION

• 6.01Other flows are changes in the value of assets and liabilities that do not result from transactions. The reason that these flows are not transactions is linked to their not meeting one or more of the characteristics of transactions, for example, the institutional units involved may not be acting by mutual agreement, as in the case of an uncompensated seizure of assets, or the change may be due to a natural event such as an earthquake rather than a purely economic phenomenon. Alternatively, the value of an asset expressed in foreign currency may change as a result of an exchange rate change.

OTHER CHANGES IN ASSETS AND LIABILITIES

• 6.02 Definition: other changes in assets and liabilities are economic flows, other than those that occur through transactions recorded in the capital and financial accounts, that change the value of assets and liabilities.

• Two types of other changes are distinguished. The first consists of changes in the volume of assets and liabilities. The second is through nominal holding gains and losses.

Other changes in the volume of assets and liabilities (K.1 to K.6)

• 6.03In the capital account, produced and non-produced assets may enter and leave a sector through acquisitions and disposals of assets, consumption of fixed capital or additions to, withdrawals from and recurrent losses from inventories. In the financial account, financial assets and liabilities enter the system when a debtor accepts a future obligation to pay a creditor, and leave the system when this obligation has been fulfilled.

• 6.04Other changes in the volume of assets and liabilities include flows that allow assets and liabilities to enter or leave the accounts other than by transactions — for example, entrances and exits of the discovery, depletion and degradation of natural assets.

• Other changes in the volume of assets and liabilities also include the effect of exceptional, unanticipated external events that are not economic in nature, and changes resulting from reclassification or restructuring of institutional units or assets and liabilities.

• 6.05Other changes in the volume of assets and liabilities cover six categories:

• (a) economic appearance of assets (K.1);

• (b) economic disappearance of non-produced assets (K.2);

• (c) catastrophic losses (K.3);

• (d) uncompensated seizures (K.4);

• (e) other changes in volume not elsewhere classified (K.5); and

• (f) changes in classification (K.6).

Economic appearance of assets (K.1)

• 6.06Economic appearance of assets is the increase in the volume of produced and non-produced assets that is not the result of production. Included are:

• (a) historic monuments, e.g. those structures or sites with special archaeological, historical or cultural significance, when their value is first recognised in the balance sheet;

• (b) valuables, such as precious stones, antiques and art objects, when the high value or artistic significance of an object not already recorded in the balance sheet is first recognised;

• (c) discoveries of exploitable subsoil resources such as proven reserves of coal, oil, natural gas, metallic or non-metallic minerals. This also covers the upwards reappraisals of the value of reserves when exploitation becomes economically viable as a result of technological progress or relative price changes;

• (d) natural growth of uncultivated biological resources, such as natural forests and the stock of fish, where the growth in such economic assets is not under the direct control, responsibility and management of an institutional unit and thus not treated as production;

• (e) transfers of other natural resources to economic activity: natural resources that change status to qualify as economic assets. Examples include the initial exploitation of virgin forests, transfer of land from a wild or waste state to land that can be put to economic use, land reclamation and initial charging for extraction of water. The natural resources may also acquire value due to economic activity in the vicinity, for example, land may be recognised as valuable because of a nearby development or creation of an access road. The cost of land improvements is recorded as gross fixed capital formation but any excess in the increase of value of the land over the value of the land improvements is recorded as economic appearance;

• (f) quality changes in natural assets due to changes in economic uses. Changes in quality are recorded as changes in volume. The quality changes recorded here occur as the counterpart of the changes in economic use that are shown as changes in classification (see paragraph 6.21). For example, the reclassification of cultivated land to land underlying buildings may result in an increase in value as well as a change in classification. In this case the asset is already within the asset boundary and it is the change in quality of the asset due to the change of economic use that is regarded as the appearance of an asset. Another example is the increase in value of dairy cattle when sent to slaughter earlier than expected;

• (g) initial appearance of value from granting transferable contracts, leases, licences or permits. The value in such contracts, leases, licences or permits represents an asset when the value of the entitlement they give exceeds the fees payable and the holder can realise this by transferring them to others; and

• (h) changes in the value of goodwill and marketing assets, which materialises when institutional units are sold at prices that exceed their own funds (see paragraph 7.07); the excess of purchase price over own funds is referred to as purchased goodwill and marketing assets. Goodwill not evidenced by a sale/purchase is not considered as an economic asset.

Economic disappearance of non-produced assets (K.2)

• 6.07Economic disappearance of non-produced non-financial assets includes:

• (a) depletion of natural resources, which covers the reduction of the value of deposits of subsoil assets, and the depletion of uncultivated biological resources included in the asset boundary (see point (e) of paragraph 6.06) as a result of harvesting, forest clearance or use beyond sustainable levels of extraction. Many of the possible entries here are the opposite of the entries described in points (c) to (f) of paragraph 6.06;

• (b) other economic disappearance of non-produced assets, which covers:
• (i) the writing-down of the value of purchased goodwill and marketing assets; and
• (ii) the expiration of the advantages given by transferable contracts, leases, licences and permits.

Catastrophic losses (K.3)

• 6.08Catastrophic losses recorded as other changes in volume result from large-scale, discrete and recognisable events that destroy economic assets.

• 6.09Such events include major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, drought and other natural disasters; acts of war, riots and other political events; and technological accidents such as major toxic spills or release of radioactive particles into the air. Examples of such events are:

• (a) deterioration in the quality of land caused by abnormal flooding or wind damage;

• (b) destruction of cultivated assets by drought or outbreak of disease;

• (c) destruction of buildings, equipment or valuables in forest fires or earthquakes; and

• (d) accidental destruction of currency or bearer securities as a result of natural catastrophes or political events, or destruction of evidence of ownership.

Uncompensated seizures (K.4)

• 6.10Uncompensated seizures occur when governments or other institutional units take possession of the assets of other institutional units, including non-resident units, without full compensation, for reasons other than the payment of taxes, fines or similar levies. The seizure of property related to criminal activity is considered to be a fine. The uncompensated part of such unilateral seizures is recorded as other change in volume.

• 6.11Foreclosures and repossessions of assets by creditors are not recorded as uncompensated seizures because, either explicitly or by general understanding, the agreement between the parties provides for this avenue of recourse.

Other changes in volume not elsewhere classified (K.5)

• 6.12Other changes in volume not elsewhere classified (K.5) are the effects of unexpected events on the economic value of assets.

• 6.13Examples of other changes in volume not elsewhere classified of non-financial assets include:

• (a) unforeseen obsolescence. Assumptions used in deriving consumption of fixed capital will not cover unforeseen obsolescence in fixed assets. The amount included for their expected obsolescence may fall short of the actual obsolescence. Entries must, therefore, be made for the decline in the value of the fixed assets resulting from, for example, the introduction of improved technology;

• (b) differences between allowances included in consumption of fixed capital for normal damage and actual losses. Consumption of fixed capital does not cover unforeseen damage, and the amount estimated for normally expected damage may fall short or exceed the actual damage. Adjustments must, therefore, be made for the unforeseen decline or increase in the value of the fixed assets due to such events. The losses adjusted for here are not sufficiently large to be considered catastrophic;

• (c) degradation of fixed assets not accounted for in consumption of fixed capital. This covers the decline in the value of fixed assets from, for example, the unforeseen effects of acidity in air and rain on building surfaces or vehicle bodies;

• (d) abandonment of production facilities before completion or being brought into economic use;

• (e) exceptional losses in inventories (e.g. from fire damage, robberies, or insect infestation of grain stores) that are not considered as catastrophic losses.

• 6.14Examples of other changes in volume not elsewhere classified concerning financial assets and liabilities include:

• (a) losses of currency or bearer securities for reasons (such as fire damage or theft) that are not considered catastrophic, and currency withdrawn from circulation that is no longer exchangeable, excluding amounts where there has been a change in classification from currency to valuables;