3.1 To compile both position and flow data for use in calculating FSIs, a consistent set of accounting principles is required. This chapter provides guidance on accounting principles that could be employed, drawing on existing international standards and taking account of the analytical needs of FSI data. But it is recognized that at this time, in practice, there is no full-fledged adherence to internationally agreed prudential, accounting, and statistical standards by all countries. Thus, in disseminating any information, countries are encouraged to disclose the basis of accounting that is used to compile FSI data series, along with the critical assumptions made.
3.2 In the Guide, flow data include transactions in goods, services, income, transfers, and nonfinancial and financial assets; holding gains and losses arising from price or exchange rate movements; and other changes in the volume of assets, such as losses from extraordinary events. Under certain circumstances, potential costs can also be included. Position data are the value of outstanding stocks of nonfinancial and financial assets, and liabilities. 1
3.3 The guiding principle in the Guide is that flows and positions should be recorded using the accrual basis of accounting. On this basis, flows are recognized when economic value is created, transformed, exchanged, transferred, or extinguished. In other words, under accrual accounting, revenue and gains are recognized in the period when they are earned, and expenses and losses when they are incurred, rather than when cash is received or disbursed. Existing actual assets and liabilities are recognized, but contingent positions are not.
3.4 The accrual approach to recording is adopted because by matching the time of recognition with the time of resource flows and the time of gains and losses in value, the economic consequences of transactions and events on the current health and soundness of the reporting entities is best observed. Moreover, this method has the advantage of capturing all types of resource flows, regardless of whether or not cash has been exchanged.
3.5 Whether assets and liabilities exist and are outstanding is determined at any moment in time by the principle of ownership. 2 So for debt instruments, the creditor owns a claim on the debtor, and the debtor has a symmetric obligation to the creditor. 3
3.6 When a transaction occurs in assets, the position should be recorded on the date of the change of ownership (the value date), when both creditor and debtor have entered the claim and liability, respectively, in their books. If an existing asset is sold by one entity to another, the first entity derecognizes and the second entity recognizes the asset on the date of the change of ownership. The date of recording Page 18 may actually be specified to ensure matching entries in the books of both parties. If no precise date can be fixed on which the change in ownership occurs, the date on which the creditor receives payment in cash or in some other asset is decisive. When a service is rendered, interest accrues, or an event occurs that creates a transfer claim (such as taxation), a financial claim is created and exists until payment is made or forgiven. Service charges, like interest, can accrue continuously. After dividends are declared payable, they are recorded as liabilities/assets until paid.
3.7 The Guide recommends that interest costs accrue continuously on debt instruments, matching the cost of funds with the provision of funds and increasing the principal amount outstanding until the interest is paid. 4 The preference of the Guide is that interest should accrue at the rate (effective yield) agreed at the time of the issuance of the debt instrument. For example, for a loan this is the contractual rate of interest. Thus, for fixed-rate instruments, the effective yield is the rate of interest that equates the future payments to the issue price. For variable-rate instruments, the yield will vary over time in line with the terms of the contract. No adjustment should be made to interest income for any gains or losses arising from financial derivatives contracts, as these are recognized as gains and losses on financial instruments (see paragraph 4.22). These recommendations for the accrual of interest are largely consistent with the approach in the related international statistical and accounting standards. 5 However, it is recognized that for data compiled under IASs (IAS 18.31), when an instrument is traded, interest accrues for the new creditor at the effective yield at the time of acquisition of the instrument and not the effective yield at the time of issuance of the instrument. 6
3.8 For interest costs that accrue in a recording period, these transactions should be recorded as an expense (income) in that period. For position data, there are three measurement possibilities for interest costs that accrue: (1) they are paid within the reporting period, in which instance there is no impact on end-period positions; (2) they are not paid, because they are not yet payable (for example, interest is paid each six months on a loan or debt security, and the position is measured after the first three months of this period-in which instance, the positions increase by the amount of interest that has accrued during the three-month period); or, (3) they are not paid when due, in which instance, the positions increase by the amount of interest costs that has accrued during the period (excluding any specific provisions against such interest-see also paragraph 4.19). The Guide recommends including interest costs that have accrued and are not yet payable as part of the value of the underlying instruments.
3.9 For bonds issued on discount or on a zero coupon basis, the difference between the issue price and the value at maturity is treated as interest and recorded as accruing over the life of the bond. As calculated interest income exceeds any coupon payments for these instruments, the difference is included in the outstanding principal amount of the asset. For instruments issued at a premium, coupon payments will exceed calculated interest income, with the difference reducing the principal amount outstanding.
3.10 When principal or interest payments are not made when due, such as on a loan, arrears are created. Arrears should continue to be recorded from their creation, which is when payments are not made, 7 until they are extinguished, such as when they are repaid, rescheduled, or forgiven by the creditor. Arrears should continue to be recorded in the underlying instrument (excluding any provisions for accrual of interest on nonperforming assets-see also paragraph 4.19).
3.11 If debt payments are guaranteed by a third party (guarantor) and the debtor defaults, the debtor records an arrear until the creditor invokes the contract conditions permitting the guarantee to be exercised. Once exercised, the debtor no longer records an arrear, as the debt is attributed to the guarantor. In other words, the arrear of the debtor is extinguished as though repaid. Depending on the contractual arrangements, in the event of a guarantee being exercised, the debt is not classified as arrears of the guarantor but instead is classified as a short-term debt liability until any grace period for payment ends.
3.12 Many types of contractual financial arrangements between institutional units give rise to conditional requirements either to make payments or provide items of economic value. 8 In this context, "conditional" means that the claim becomes effective only if a stipulated condition or conditions arise. These arrangements are referred to as contingent items and are not recognized as financial assets (or liabilities) in the Guide, because they are not actual claims (or obligations). Nonetheless, such arrangements represent potential exposures to risks.
3.13 The types of contingent arrangements for which data could be collected on the basis of the maximum potential exposures 9 are described below.
3.14 Loan and other payment guarantees are commitments to make payments to third parties when another party, such as a client of the guarantor, fails to perform some contractual obligations. These are contingent liabilities because payment is required only if the client fails to perform, and until such time no liability is recorded on the balance sheet of the guarantor. The common type of risk assumed by a deposit-taking guarantor is commercial risk or financial performance risk of the borrower.
3.15 Included under payment guarantees are letters of credit (LoCs). Irrevocable and stand-by LoCs are guarantees to make payment upon nonperformance by the client, provided all the conditions in the letter have been met. LoCs are an important mechanism for international trade. Revocable LoCs allow the terms of the letter to be changed without prior approval of the beneficiary. Also included are performance bonds that normally cover only part of the contract value but in effect guarantee a buyer of goods, such as an importer, that the seller, such as an exporter, will meet the terms of the contract.
3.16 Lines of credit and credit commitments, including undisbursed loan commitments, are contingencies that provide a guarantee that undrawn funds will be available in the future, but no financial liability/ asset exists until such funds are actually advanced.
3.17 Included under credit commitments are unutilized back-up facilities such as note...