## Appendix Annex 2 — Debt Reorganization and Related Transactions

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### Overview
- Discusses forms of debt reorganization and related transactions and how they are recorded in the external accounts (balance of payments and the international investment position). (A2.1)
- References: IMF and others, External Debt Statistics: Guide for Compilers and Users, Chapter 8, Debt Reorganization; IMF, Government Finance Statistics Manual 2014, Appendix 3, Debt and Related Operations.

### Definition and general principles
- Debt reorganization (debt restructuring) alters terms established for servicing an existing debt via an arrangement involving creditor and debtor (and sometimes third parties). (A2.2)
- Governments may act as debtor, creditor, or guarantor; private-sector exchanges can be involved. (A2.2)
- Purpose is typically to provide relief for liquidity or sustainability issues. (A2.3)
- A unilateral failure to honor obligations (default, unilateral moratorium) is not debt reorganization and gives rise to arrears. Unilateral creditor write-offs are not debt reorganization. (A2.4)

### Main types of debt reorganization
- (a) Debt forgiveness — contractual reduction or extinguishing of a debt obligation by the creditor.
- (b) Debt rescheduling or refinancing (debt exchange) — change in terms and conditions of the amount owed; may or may not reduce burden in present value terms.
- (c) Exchange of the debt claim for nondebt value — debt conversions (debt-for-equity, debt-for-real-estate, debt-for-development, debt-for-nature) and debt prepayment (buy-backs for cash).
- (d) Debt assumption and debt payments on behalf of others when a third party is involved.
- Packages may combine types (e.g., forgiveness plus rescheduling). (A2.6)

### Debt forgiveness — definition and accounting
- Definition:
  - Voluntary cancellation of all or part of a debt obligation within a creditor–debtor contractual arrangement intended to convey a benefit to the debtor; includes principal outstanding and accrued interest arrears and other interest costs that have accrued but not future unpaid interest. (A2.7)
  - Some debt swaps committing the debtor to development/environment expenses are considered debt forgiveness because no value is provided to the creditor. (A2.5/A2.7 footnote)
- Standard presentation (BOP/IIP):
  - Recorded at agreement effect as a capital transfer receipt of the debtor economy (transfer payment of the creditor economy) with repayment of the debtor’s liability in the financial account; debtor liability and creditor asset in the IIP are reduced by the amount forgiven. Market prices are the basis of valuation except for loans where nominal value is used. (A2.8)
- Analytic presentation (exceptional financing):
  - Forgiveness of obligations due in the current period: credit under debt forgiveness below-the-line; reduction of obligations shown above-the-line as a debit. (A2.9)
  - Forgiveness of arrears from previous periods: both a credit under debt forgiveness and a debit under cancellation of arrears recorded below-the-line. (A2.9)
  - Forgiveness of obligations not yet due: no exceptional financing entries; all entries are above-the-line. (A2.9)

### Debt rescheduling — definition, timing, and accounting (A)
- Definition:
  - Bilateral formal deferment of debt service and application of new/extended maturities; new terms may include extended repayment periods, reduced contracted interest rates, grace periods, fixed favorable exchange rates, and rescheduling arrears. Zero-coupon principal reductions may be classified depending on whether contractual interest is acknowledged changed. Paris Club: “flow” vs “stock” rescheduling. (A2.11)
- Standard presentation:
  - Existing contract extinguished and replaced by new contract: repayment of old debt recorded as a debit under the appropriate instrument and creation of the new debt recorded as a credit under the appropriate instrument. Exception: when only interest arrears rescheduled but contract conditions intact. (A2.12)
  - If rescheduling includes forgiveness elements, record a capital transfer for the difference in contract values. (A2.12)
- Timing:
  - Transaction recorded when both parties record the change; if not precise, creditor’s recording is decisive. Conditional multiyear rescheduling entries recorded only when specified conditions are met. (A2.13)
- Analytic presentation (exceptional financing):
  - Obligations falling due in reporting period: recorded under exceptional financing as credit entries with debit entries above-the-line in financial and income accounts; arrears recorded below-the-line with offsetting credit and debit; obligations not yet due have both debit and credit entries above-the-line. (A2.14)

### Debt refinancing — definition and accounting (B)
- Definition:
  - Replacement of an existing debt instrument (including arrears) with new instrument(s); can be same-type or different-type exchanges and may involve different creditors. Examples include bond exchange offers. (A2.15)
- Standard presentation:
  - Old debt extinguished and replaced by new instrument; extinguished at value of new instrument except for nonmarketable debt owed to official creditors. (A2.16)
  - Direct debt exchanges (loan-for-bond): debtors record debit entries under appropriate debt instrument and income account (accrued interest) and a credit entry under portfolio investment liabilities for the new obligation; transaction valued at value of new debt and difference recorded in the revaluation account. For nonmarketable official loans, old debt extinguished at original value and difference recorded as debt forgiveness. (A2.17)
- Valuation proxies when no market price:
  - market price of similar traded bonds; acquisition price if creditor recently acquired debt; discounted value using prevailing interest rate if new bond interest below prevailing rate; face value if no information. (A2.18)
- IIP effects:
  - Extinguishment of old instrument and creation of new instrument; loan-for-bond exchange generally reduces debtor liabilities because loans are at nominal value vs market value of bonds. Any valuation change recorded in the revaluation account. (A2.19)
- Analytic presentation:
  - Debt-for-bond exchanges for obligations falling due in reporting period: recorded below-the-line as credit entries in exceptional financing with debit entries above-the-line under financial and income accounts. (A2.20)
  - Arrears refinanced: offsetting credit (relevant instrument) and debit (rescheduling of arrears) under exceptional financing. Obligations not yet due: both entries above-the-line. Cancellation of arrears as result of a debt-for-debt exchange: debit under cancellation of arrears and credit under debt forgiveness below-the-line. (A2.20)
- Partial payoffs with new debt proceeds:
  - Remaining debt recorded as extinguishment of old debt and creation of new debt unless paid off through a separate transaction. (A2.21)

### Debt conversion (swaps) — definitions and accounting
- Definitions:
  - Debt conversion (swap): exchange of debt, typically at a discount, for a nondebt claim (equity or counterpart funds) often in domestic currency; extinguishes external debt and creates a nondebt liability. Examples: debt-for-equity, debt-for-exports, debt-for-nature, debt-for-development. (A2.23–A2.26)
  - Debt-for-equity swaps reduce debt liability and increase equity liability; third parties (NGOs or corporations) often buy claims and receive shares or local currency. (A2.24)
  - Direct vs indirect conversion: direct leads directly to nondebt claim; indirect leads via another claim (e.g., deposit later used to purchase equity). (A2.26)
- General accounting principles:
  - Transactions recorded when both parties record exchange of value. Old debt valued at value of item acquired (converted at prevailing market exchange rate if item in foreign currency). Difference between debt extinguished and claim provided recorded as a valuation adjustment in revaluation account. (A2.27)
  - Exception: official creditors owed nonmarketable debt where counterpart claim has lower value — old debt recorded at full value and difference recorded as debt forgiveness (capital transfer). Recording for debt-for-development swaps based on type of debt forgiven. (A2.27)
  - Debt-for-equity and debt-for-development swaps are most common. (A2.28)

### Debt-for-equity swaps — direct conversion (standard and analytic)
- Standard presentation:
  - Direct conversion: credit entries under direct investment–equity or portfolio investment–equity; transactions recorded at value of equity acquired; offsetting debit entries under appropriate debt instrument for liability reduction. (A2.29)
- Treatment by timing/status of debt:
  - Debt due in current period: debtor records debit entries under relevant instrument and income account for accrued interest; repayment value of old debt equals market value of equity; contra-entry credit in direct investment–equity or portfolio investment–equity; valuation adjustment in revaluation account if market value lower. (A2.30)
  - Analytic: debit entries above-the-line and contra-entry credit below-the-line under direct investment or portfolio investment–equity. (A2.31)
  - Debt in arrears: standard—debit in financial account at value of equity provided, credit in direct investment–equity or portfolio investment–equity; analytic—debit under cancellation of arrears and offsetting credit in exceptional financing. (A2.32)
  - Debt due in future: standard—debit at value of equity liabilities provided with contra-entry credit in direct investment–equity if equity entitles holder to 10 percent or more of voting power; otherwise record under portfolio investment–equity; valuation adjustment recorded if market value lower. (A2.33)
  - IIP effect: equity liabilities increase and debt liabilities decrease by value of instrument extinguished. (A2.34)

### Debt-for-equity swaps — indirect conversion and debt-for-development swaps
- Indirect conversion:
  - Example: foreign currency liability exchanged at a discount for domestic deposit; nonresident reinvests deposit into equity. Valued at market prices in BOP. (A2.35)
  - Standard: debtor records increase in liabilities under provided instrument with debit offset under instrument extinguished; subsequent exchange to equity recorded under direct investment–equity if equity holding entitles to 10 percent or more of voting power, otherwise under portfolio investment–equity. IIP: equity liabilities increase and debt liabilities decrease. (A2.36)
  - Analytic: same as direct conversion except initial transaction credit recorded under the financial instrument provided. (A2.37)
- Debt-for-development swaps:
  - Definition: exchange at a discount of liability for a claim earmarked for specific development purpose (NGO may buy debt at a discount and resell to debtor government for local currency to spend on projects). (A2.38)
  - Standard: debtor records transaction with creditor as increase in liabilities under appropriate debt instrument provided and offsetting debit under extinguished debt instrument; IIP liabilities decline by value extinguished and increase by value of other claim if still outstanding at period end. (A2.39)
  - Analytic: if undertaken to meet a BOP need, only initial transaction with creditor is relevant; subsequent use by creditor is recorded as capital transfers and not exceptional financing. (A2.40)

### Debt prepayment (buybacks) — definitions, motivations, and accounting
- Definitions and motivations:
  - Debt prepayments are repurchases or early payments of debt at agreed conditions; “buybacks” occur when prepaid at a discount. Motivations include reducing portfolio cost or addressing BOP needs. (A2.41)
- Standard presentation:
  - Debtor records debit entries in appropriate instrument in the financial account at value of debt prepaid; credit entries recorded in reserve assets or currency and deposits in other investment–assets depending on financing source; IIP liability declines by amount prepaid. If financed from reserve assets for BOP needs, both credit and debit items recorded below-the-line in exceptional financing and reserve assets respectively. Prepayments using debtor’s own nonreserve financial assets recorded above-the-line. If debt owed to official creditors and nonmarketable, prepayment within agreement intending to convey a benefit may include debt forgiveness element. (A2.42)
- Analytic presentation:
  - Recorded as exceptional financing only if financed from reserve assets for BOP purposes; debit entries below-the-line in exceptional financing with offsetting credit entries in reserves recorded below-the-line. (A2.43)

### Debt prepayment financed by external donor funds — two-stage analysis
- Stage 1:
  - Debtor records credit under capital transfers in capital account equal to donor funds provided; offsetting debit in reserve assets. Analytic: credit below-the-line under transfers in exceptional financing; offsetting debit in reserve assets. (A2.45)
- Stage 2:
  - At prepayment, debtor records repayment of the debt instrument as debit at value paid with offsetting credit in reserve assets; analytic: debit under relevant debt instrument below-the-line and credit under reserve assets. Savings arise in future years from prepayment. Debit recorded below-the-line as transaction affects reserve assets in reporting period. (A2.46)
- IIP effect:
  - Assets increase in stage 1 and decline, along with debt liabilities, when prepayment occurs. (A2.47)

### Debt assumption and debt payments on behalf of others — definitions and accounting
- Debt assumption:
  - Trilateral agreement where new debtor assumes former debtor’s liability and is liable for repayment; calling a guarantee is an example. If original debtor defaults and guarantor is called, guarantor repays or assumes responsibility and original debtor’s liability is extinguished. (A2.48)
  - Amount recorded is full outstanding debt unless creditor agrees to reduce it; timing is when debt removed from original debtor’s balance sheet. (A2.49)
  - Standard presentation: creditor records new loan claim on new debtor. Extinguishing original debt is classified as a transaction if original debtor continues to exist, or as an other volume change with capital transfer from new debtor to creditor if original debtor no longer exists. (A2.50)
  - Residency and sector effects: if assuming and original debtor are resident in same economy, sector classification may change; if in different economies, recording depends on whether assuming economy obtained claim on original debtor; where no claim exists, record capital transfer (debt forgiveness) from assuming to original debtor; direct investment relationships may trigger equity changes. Partial claims prorated between rescheduling and forgiveness. (A2.51–A2.53)
- Debt payments on behalf of others:
  - Definition: government repays or makes payment on behalf of another unit without guarantee being called or debt assumed; debt remains on original debtor’s balance sheet. This is not debt reorganization. (A2.54)
  - Accounting by residency and claim:
    - Same-economy payer and debtor: no BOP transactions between them. (A2.56)
    - Different economies and claim established: paying economy records increase in financial assets and decrease in reserve assets or currency and deposits depending on funding; otherwise record capital transfer or direct investment–equity. Payment not recorded as interest or principal by paying economy because payment not related to liability in its balance sheet. (A2.56)
    - No claim and BOP need: analytic—debtor country records credit below-the-line in transfers (other intergovernmental grants) in exceptional financing and a debit above-the-line reflecting any interest and principal payments made. (A2.57)

### Special cases: technical arrears and moratoria
- Technical arrears between Paris Club Agreed Minutes and implementation date:
  - Payments falling due before effective implementation date but not payable on schedule while interest continues to accrue are technical arrears. Standard: treated as rescheduled short-term debt classified under other investment, other accounts receivable/payable until effective date; reclassification when new terms apply. Analytic: debit entries above-the-line with corresponding credit entries below-the-line as accumulation of arrears in exceptional financing. (A2.58–A2.60)
- Debt service moratorium extended by creditors:
  - Formal suspension of debt service payments in a given period, often short-term relief (e.g., G20 Debt Service Suspension Initiative during COVID-19, tsunamis 2005). Classification: treat as debt rescheduling if formal mutual agreement (e.g., exchange of letters); then arrears are not created. Standard: debit entry representing repayment as obligations fall due with credit entry representing creation of new debt under same instrument. Analytic: debit entries of obligations falling due recorded above-the-line and contra-entries recorded as rescheduling of existing debt under other investment liabilities in exceptional financing. (A2.61–A2.62)

### New money facilities
- Purpose:
  - Agreed to assist debtor to overcome temporary BOP difficulties; new money used to repay maturing debt obligations.
- Standard presentation:
  - Drawings recorded by debtor as a credit; offsetting debit under appropriate instrument (e.g., reserve assets). As maturing obligations are paid, debit entries under debt instrument for principal and income for interest accrued in current period. IIP: debtor liabilities (creditor assets) increase by new borrowing. (New money facilities section)
- Analytic presentation:
  - Credit for full amount borrowed recorded under drawings on new loans in exceptional financing with offsetting debit under reserve assets. Scheduled debt payments from new borrowings not regarded as exceptional financing (debits above-the-line and offsetting reserve entries). Advance repayments for BOP purposes from reserve assets recorded as debit items under exceptional financing. If terms concessional, creditor provides a transfer. (New money facilities section)

### Defeasance
- Definition and treatment:
  - Debtor matches debt-service outflows with financial assets that produce equivalent inflows and removes both asset and liabilities from its balance sheet; Manual does not recognize defeasance as affecting debtor’s debt so long as legal obligations unchanged.
- Implementation:
  - Hold assets/liabilities in separate account within unit or transfer to another unit.
- Macroeconomic statistical treatment:
  - Debt remains on liabilities side and financial assets on asset side and transactions recorded in BOP if with nonresidents. If transferred to separate unit resident in another economy, transactions recorded in financial account. If both units resident in same economy but different sectors, record a reclassification in other changes in volume account.

### Debt write-offs
- Creditor unilateral write-off:
  - No transactions recorded in standard framework; creditor records reduction in financial assets through other changes in the volume of assets account. Corresponding liability removed from debtor balance sheet through other changes in volume account.

### Debt concessionality
- Definition:
  - Concessional loans intentionally provided at contractual interest rate below market interest rates for similar grace and repayment periods to convey a benefit in a noncommercial context.
- Use and measurement:
  - Important in discussions on debt relief for heavily indebted poor countries. No consistent definition or measure in economic accounts.
- Paris Club practice:
  - Debt reduction in present value terms calculated using a market-based discount rate, usually the OECD’s Commercial Interest Reference Rate (CIRR). Difference between nominal value and present value is capital transfer from debt reorganization arrangements.
- Supplementary recording recommended:
  - Transfer element not recorded in central macroeconomic framework but economies encouraged to provide supplementary items for concessional loans provided in a nonmarket context (governments, central banks, international organizations).
  - Supplementary one-off transaction capital transfer at loan origination equal to difference between:
    - the present value of cash flows discounted by the contractual interest rate and
    - the nominal value of the debt and its present value (using a market discount rate such as CIRR).
  - For a new loan, requires information on market interest rate at inception and contractual interest rate; market rate used as discount factor and difference equals value of transfer.
  - Advantages: considers maturity, grace, payment frequency, interest rate, and other costs; consistent with nominal valuation of loans and economic equivalence between a concessional loan of 100 units with an embedded grant element of 35 percent, and a commercial loan of 100 units combined with a direct grant of 35 units.
  - Transfer value calculated at inception as difference between nominal value and present value using current market interest rate as discount factor.
- Loan retirement before maturity and replacement:
  - Adjustment required: subtract value of transfers not yet received on original loan from original transfer value to avoid overstatement.
  - Recalculate transfer at inception using actual payment schedule outturn, including retirement at rescheduling time; replace original value in historical supplementary series so historical data reflect actual transfers received.

### Debt arising from off-market swaps
- Nature and definition:
  - Off-market swap: swap contract with nonzero value at inception because reference rates priced differently from current market values; typically involves a lump sum paid at inception.
  - Economic nature: combination of borrowing a debt (lump-sum nonzero value treated as loan) and an on-market swap (financial derivative). Loan component is debt and part of public sector external debt if a public sector resident receives lump sum from nonresident. (Off-market swaps section)
- Balance sheet recording:
  - Record two stock positions:
    - A loan equal to nonzero value of swap at inception with maturity equal to swap expiration.
    - A financial derivative (swap) component with market value zero at inception.
  - If swap involves exchange of principals, record at market value in relevant item (likely currency and deposits).
  - Loan is liability of party receiving lump sum; derivative may appear as asset or liability depending on market prices at balance sheet date.
  - Future flows partitioned between loan and derivative components.
- Off-market central bank swaps:
  - Treated as exchange of deposits with maintenance of value and do not require recordings in financial derivatives.

*IMF BPM7 Annex 2: Debt Reorganization and Related Transactions.*

### Appendix Annex 2

### Appendix Annex 2 — Debt Reorganization and Related Transactions

### Overview
- The appendix discusses various forms of debt reorganization and related transactions, and how they are recorded in the external accounts (balance of payments and the international investment position). (A2.1)
- References include: IMF and others, External Debt Statistics: Guide for Compilers and Users, Chapter 8, Debt Reorganization; and IMF, Government Finance Statistics Manual 2014, Appendix 3, Debt and Related Operations. (Reference)

### Definition and general principles
- Debt reorganization (also referred to as debt restructuring) is an arrangement involving both the creditor and the debtor (and sometimes third parties) that alters the terms established for servicing an existing debt. (A2.2)
- Governments can be debtors, creditors, or guarantors; private-sector debt exchanges can also be involved. (A2.2)
- Debt reorganization typically provides relief to the debtor from original terms and conditions, in response to liquidity issues or sustainability issues. (A2.3)
- A unilateral failure to honor obligations (default, unilateral moratorium) is not debt reorganization; it gives rise to arrears. Debt write-offs by creditors (unilateral removal of claims from books) are not debt reorganization. (A2.4)

### Main types of debt reorganization (A2.5–A2.6)
- (a) Debt forgiveness: reduction in the amount of, or extinguishing of, a debt obligation by the creditor via a contractual arrangement with the debtor.
- (b) Debt rescheduling or refinancing (debt exchange): change in the terms and conditions of the amount owed, which may or may not reduce burden in present value terms.
- (c) Exchange of the debt claim for something of economic value other than another debt claim: includes debt conversion (debt-for-equity, debt-for-real-estate, debt-for-development, debt-for-nature) and debt prepayment (debt buy-backs for cash).
- (d) Debt assumption and debt payments on behalf of others when a third party is involved.
- Debt reorganization packages may combine types (for example, debt forgiveness plus rescheduling of remaining debt). (A2.6)

### 1. Debt forgiveness
- Definition:
  - “Debt forgiveness” (or debt cancellation) is the voluntary cancellation of all or part of a debt obligation within a contractual arrangement between a creditor and a debtor. It arises from agreement intended to convey a benefit to the debtor, not from a unilateral creditor write-off. Debt forgiveness may include principal outstanding and accrued interest arrears and other interest costs that have accrued. It does not include cancellation of future interest payments not yet due and not yet accrued. (A2.7)
  - Some debt swaps that commit the debtor to undertake development or environmental expenses are to be considered under debt forgiveness because no value is provided to the creditor. (footnote in A2.5 / A2.7)
- Accounting (treatment in BOP and IIP):
  - In the balance of payments, debt forgiveness is recorded (at the time the agreement takes effect) in the standard presentation as a capital transfer receipt of the debtor economy (transfer payment of the creditor economy), with a repayment of the debtor’s liability in the financial account (a receipt in the creditor’s asset). In the IIP, the debtor’s liability and creditor’s asset are reduced by the amount forgiven. Market prices are the basis of valuation for flows and stocks, except for loans where nominal value is used. (A2.8)
  - In the analytic presentation (exceptional financing), recording depends on whether the debt is due in the current period, in arrears, or not yet due:
    - Forgiveness of obligations due in the current period: recorded below-the-line as a credit under debt forgiveness; the reduction of obligations is shown above-the-line as a debit. (A2.9)
    - Forgiveness of arrears from previous periods: both a credit under debt forgiveness and a debit under cancellation of arrears are recorded below-the-line under exceptional financing. (A2.9)
    - Forgiveness of obligations not yet due: no entries under exceptional financing; all entries are above-the-line. (A2.9)

### 2. Debt rescheduling and refinancing — definitions and accounting
- General:
  - Both rescheduling and refinancing involve a change in an existing debt contract and replacement by a new debt contract, generally with extended debt service. Debt rescheduling rearranges the same type of instrument with the same principal value and the same creditor; refinancing entails a different debt instrument, generally at different value, and may involve a different creditor. (A2.10)
  - If refinancing involves borrowing from a third party to repay a creditor, related balance of payments support transactions are addressed elsewhere. (footnote in A2.10 / Section D reference)

- A. Debt rescheduling
  - Definition:
    - Debt rescheduling is a bilateral arrangement constituting formal deferment of debt service payments and application of new and generally extended maturities. New terms may include extending repayment periods, reducing contracted interest rates, adding or extending grace periods, fixing exchange rates at favorable levels for foreign currency debt, and rescheduling arrears. For zero-coupon securities, certain principal reductions may be classified as debt forgiveness or rescheduling depending on whether the bilateral agreement acknowledges a change in contractual interest. (A2.11)
    - Under Paris Club arrangements, rescheduling can be “flow” rescheduling (specified debt service falling due during a certain period, possibly including specified arrears) or “stock” rescheduling (rescheduling the outstanding stock of debt at a particular point in time). (A2.11, footnote)
  - Accounting (treatment):
    - In the BOP, the existing contract is extinguished and a new contract created: the applicable existing debt is recorded as repaid and a new debt instrument created with the new terms. In the standard presentation for the debtor, a debit entry records repayment of the old debt under the appropriate instrument, and a credit entry records creation of the new debt under the appropriate instrument. This does not apply when only interest arrears are being rescheduled while conditions of the existing contract remain intact. (A2.12)
    - If the rescheduling includes debt forgiveness elements, a capital transfer is recorded for the difference in contract values. (A2.12)
    - Timing: the transaction is recorded when both parties record the change in their books; if no precise time, the creditor’s recording is decisive. If rescheduling of obligations beyond the current period is conditional on future fulfillment (e.g., multiyear Paris Club rescheduling), entries are recorded only when specified conditions are met. (A2.13)
    - Analytic presentation: treatment in exceptional financing depends on whether debt being rescheduled is due in the current period, in arrears, or not yet due — obligations falling due in the reporting period are recorded under exceptional financing as credit entries, with debit entries above-the-line in the financial account and income account for accrued interest; arrears are recorded below-the-line with offsetting credit and debit items; obligations not yet due have both debit and credit entries above-the-line. (A2.14)

- B. Debt refinancing
  - Definition:
    - Debt refinancing involves replacement of an existing debt instrument (including any arrears) with a new debt instrument or instruments. It can involve same-type exchanges (loan-for-loan) or different types (loan for bond) and can occur irrespective of balance of payments difficulties. Exchange offers to swap existing bonds for new bonds are an example. (A2.15)
  - Accounting (treatment):
    - The BOP treatment is similar to rescheduling: the old debt is extinguished and replaced by a new instrument. Unlike rescheduling, the old debt is extinguished at the value of the new instrument except for nonmarketable debt owed to official creditors. (A2.16)
    - Direct debt exchanges (loan-for-bond swaps): in the standard presentation, debtors record debit entries under the appropriate debt instrument in the financial account and income account (for accrued interest) and a credit entry under portfolio investment liabilities to show creation of the new obligation. The transaction is valued at the value of the new debt; the difference between old and new debt values is recorded in the revaluation account. For nonmarketable loans owed to official creditors, the old debt is extinguished at original value and the difference is recorded as debt forgiveness. (A2.17)
    - Valuation proxies when no market price exists:
      - Use market price of similar traded bonds if comparable.
      - Use acquisition price if the creditor recently acquired the debt.
      - Use discounted value of the bond using prevailing interest rate if new bond interest is below prevailing rate.
      - If no information, face value of the bond may be used as a proxy. (A2.18)
    - The IIP reflects extinguishment of the old instrument and creation of the new instrument, including any valuation change recorded in the revaluation account; a loan-for-bond exchange will generally reduce debtor liabilities because loans are recorded at nominal value versus market value of bonds. (A2.19)
    - Analytic presentation:
      - Debt-for-bond exchanges for obligations falling due in the reporting period: recorded below-the-line as credit entries under the appropriate instruments in exceptional financing, with debit entries above-the-line under the financial account and income account (for accrued interest). (A2.20)
      - Arrears refinanced: offsetting credit (relevant instrument) and debit (rescheduling of arrears) items under exceptional financing. (A2.20)
      - Obligations not yet due: both debit and credit entries recorded above-the-line under the appropriate instruments. (A2.20)
      - If arrears are cancelled as a result of a debt-for-debt exchange, entries are below-the-line: a debit under cancellation of arrears and a credit under debt forgiveness. (A2.20)
    - If proceeds of new debt are used to partially pay off existing debt, remaining debt is recorded as extinguishment of old debt and creation of new debt, unless paid off through a separate transaction. (A2.21)

### Debt concessionality and transfers
- If terms of new borrowings are concessional, the creditor could be seen as providing a transfer to the debtor; debt concessionality is discussed in the appendix. (A2.22)

*Appendix Annex 2, Debt Reorganization and Related Transactions, IMF.*

### 3. Debt conversion and debt prepayment

### 3. Debt conversion and debt prepayment

### Definitions of debt conversion
- Debt conversion (swap) is an exchange of debt —(typically at a discount) —for a nondebt claim such as equity, or for counterpart funds that can be used to finance a particular project or policy. Typically, debt conversion involves an exchange of external debt in foreign currency for a nondebt obligation in domestic currency, at a discount. Examples include debt for equity, debt for exports, debt for nature, and debt for development swaps. In essence, external debt is extinguished and a nondebt liability created. (A2.23–A2.26)
- A debt-for-equity swap results in reduced debt liability and an increase in equity liability of the debtor economy. A third party, usually a nongovernmental organization (NGO) or a corporation, is often involved, buying the claims from the foreign creditor and receiving shares in a corporation or local currency (to be used for equity investment) from the debtor economy. (A2.24)
- Distinction between direct and indirect debt conversion: direct swaps lead directly to acquisition of a nondebt claim on the debtor; indirect swaps lead via another claim on the economy, such as a deposit subsequently used to purchase equity. (A2.26)

### Accounting treatment—general principles
- Transactions are recorded when both parties record the exchange of value in their books. The old debt is valued at the value of the item acquired (converted at the prevailing market exchange rate if the item is in foreign currency). Any difference between the value of the debt being extinguished and the corresponding claim or funds provided is recorded as a valuation adjustment in the revaluation account. (A2.27)
- Exception: when official creditors are owed nonmarketable debt and the counterpart claim has a lower value than the debt, the old debt is recorded at its full value and the difference is recorded as debt forgiveness, a capital transfer. With debt-for-development swaps, recording should be based on the type of debt obligation forgiven rather than the subsequent use of the funds. (A2.27)
- Debt-for-equity and debt-for-development swaps are the most commonly used debt conversion arrangements. (A2.28)

### Debt-for-equity swaps — direct conversion (standard and analytic presentations)
- Direct debt conversion: for debt exchanged directly for equity, credit entries are recorded under direct investment–equity or portfolio investment–equity, and transactions are recorded at the value of the equity acquired; offsetting debit entries are made under the appropriate debt instrument for the reduction in liabilities. (A2.29)
- Debt due for payment in the current period:
  - Standard presentation: debit entries under the relevant instrument (e.g., other investment liabilities) and the income account (for accrued interest) for payments falling due in the current period; repayment value of old debt equals the market value of the equity liability being swapped; contra-entry credit recorded in direct investment–equity or portfolio investment–equity. If market value of new liability is lower than the old debt, a valuation adjustment is recorded in the revaluation account. (A2.30)
  - Analytic presentation: debit entries above-the-line and the contra-entry credit recorded below-the-line under direct investment or portfolio investment–equity. (A2.31)
- Debt in arrears:
  - Standard presentation: recorded as a debit entry under the relevant instrument in the financial account at the value of the equity liabilities being provided, with contra-entry credit in direct investment–equity or portfolio investment–equity. (A2.32)
  - Analytic presentation: debit entry recorded in exceptional financing under cancellation of arrears, with offsetting credit in exceptional financing under direct investment–equity or portfolio investment–equity. (A2.32)
- Debt due for payment in the future:
  - Standard presentation: debit entries recorded at the value of the equity liabilities being provided with contra-entry credit in direct investment–equity if the equity holder directly holds equity that entitles it to 10 percent or more of the voting power in the direct investment enterprise; otherwise, record under portfolio investment–equity. If market value of new liability is lower than old debt, a valuation adjustment is recorded in the revaluation account. (A2.33)
  - Analytic presentation: all entries are made above-the-line as in the standard presentation. (A2.33)
- International investment position (IIP) effect: in all cases, equity liabilities (direct or portfolio) increase and debt liabilities decrease by the value of the instrument extinguished. (A2.34)

### Debt-for-equity swaps — indirect conversion
- Indirect conversion example: a fixed-payment foreign currency liability is exchanged at a discount for a domestic financial instrument (e.g., domestic currency deposit); proceeds are then reinvested by the nonresident into equity of the debtor. Such swaps are valued at market prices in the balance of payments (BOP). (A2.35)
- Standard presentation: debtor records an increase in liabilities (credit) under the financial instrument provided with corresponding debit entries under the instrument being extinguished; when the nonresident subsequently exchanges the instrument for equity, a credit entry is recorded under direct investment–equity if the equity holder directly holds equity entitling it to 10 percent or more of voting power; otherwise under portfolio investment–equity. Offsetting debit entry made under the instrument exchanged for equity, such as currency and deposits. IIP effect: equity liabilities increase and debt liabilities decrease by the value extinguished. (A2.36)
- Analytic presentation: treatment is the same as for direct debt conversion except only the initial transaction is relevant, so the credit is recorded under the relevant financial instrument provided rather than equity. (A2.37)

### Debt-for-development swaps
- Definition: exchange at a discount of an existing liability for a claim (such as a domestic deposit) earmarked for a specific development purpose in the debtor economy; an NGO may purchase debt at a discount and resell it to the debtor government for local currency equivalent, then spend the money on an agreed development project. (A2.38)
- Standard presentation: the debtor records the transaction only with the creditor (e.g., an NGO): an increase in liabilities (credit) under the appropriate debt instrument provided to the creditor, with an offsetting debit entry under the debt instrument being extinguished. In the IIP, liabilities decline by the value of the debt extinguished and increase by the value of the other claim provided that it is still outstanding at the end of the period. (A2.39)
- Analytic presentation: if undertaken to meet a BOP need, only the initial transaction with the creditor is relevant; subsequent use by the creditor of assets acquired for development is recorded as capital transfers and is not exceptional financing. (A2.40)

### Debt prepayment — definitions and motivations
- Debt prepayments are repurchases or early payments of debt at conditions agreed between the debtor and the creditor; debt is extinguished in return for a cash payment agreed between the parties. When a discount relative to nominal value is involved, prepayments are called “buybacks.” Motivations include reducing cost of the debt portfolio by taking advantage of favorable market conditions or addressing balance of payments (BOP) needs, such as a looming BOP constraint. (A2.41)

### Accounting treatment of debt prepayment
- Standard presentation: debtor records debit entries in the appropriate instrument in the financial account when transactions take place at the value of the debt prepaid; credit entries recorded in reserve assets or in currency and deposits in other investment–assets depending on the source of financing. In the IIP, the debtor’s liability declines by the amount of debt prepaid. If prepayment is linked to BOP needs and financed from reserve assets, both credit and debit items are recorded below-the-line in exceptional financing and reserve assets, respectively. Prepayments using debtor’s own financial assets other than reserve assets are recorded above-the-line as in the standard presentation. If debt is owed to official creditors and is nonmarketable (loan), some element of debt forgiveness could arise if prepayment occurs within an agreement intending to convey a benefit. (A2.42)
- Analytic presentation: debt prepayment transactions are recorded as exceptional financing only if financed from reserve assets for BOP purposes; debit entries are recorded below-the-line in exceptional financing with offsetting credit entries in reserves recorded below-the-line. (A2.43)

### Debt prepayment financed by external donor funds — two-stage analysis
- Stage 1:
  - Debtor records in the standard presentation a credit entry under capital transfers in the capital account equal to donor funds provided; an offsetting debit entry is recorded in reserve assets. Analytic presentation: credit entry below-the-line under transfers in exceptional financing; offsetting debit recorded in reserve assets. (A2.45)
- Stage 2:
  - When the debt prepayment occurs, debtor records in the standard presentation the repayment of the debt instrument as a debit entry at the value paid with an offsetting credit entry in reserve assets. Analytic presentation: the debit entry is recorded under the relevant debt instrument below-the-line and the credit entry under reserve assets. Savings arise in future years as a result of the prepayment of the debt. The debit entry is recorded below-the-line as the transaction affects reserve assets in the reporting period. (A2.46)
- IIP effect: assets increase in the first stage and decline, along with debt liabilities, when the prepayment takes place. (A2.47)

### Debt assumption (definition and accounting)
- Definition: a trilateral agreement among creditor, former debtor, and new debtor under which the new debtor assumes the former debtor’s outstanding liability and is liable for repayment. Calling a guarantee is an example. If the original debtor defaults and the guarantor is called, the guarantor must repay or assume responsibility and the original debtor’s liability is extinguished. Governments may act as debtor or guarantor, or provide funds to pay off another government’s obligation. (A2.48)
- Amount and timing: the amount recorded is the full amount of outstanding debt unless creditor agreement reduces it; timing is when the debt is removed from the original debtor’s balance sheet. (A2.49)
- Standard presentation: creditor records a new loan debt claim on the new debtor. Extinguishing of original debt is classified as a transaction if the original debtor continues to exist, or as an other volume change (with capital transfer from new debtor to creditor) if the original debtor no longer exists. (A2.50)
- Residency and sector effects: if assuming entity and original debtor are resident in same economy, sector classification of debtor may change. If located in different economies, recording depends on whether the assuming economy obtained a claim on the original debtor. If a legal obligation exists for the original debtor to reimburse the guarantor, the original debtor economy records credit and debit entries under the relevant debt instruments; if no claim established, a capital transfer (debt forgiveness) is recorded from the assuming to the original debtor economy. If the original debtor is in a direct investment relationship with the assuming economy, equity changes in the direct investment enterprise are recorded. If the new debtor acquires a claim that only partially covers the debt acquired, the difference is classified as debt forgiveness by both original and new debtors. If the original debtor no longer exists, an other volume change is recorded. (A2.51–A2.52)
- Analytic presentation: if new and original debtors are resident in different economies, recording of debt assumption is the same as for debt rescheduling if the new debtor acquires a claim on the original debtor; otherwise, recording is the same as for debt forgiveness, except where direct investment adjustments apply. Partial claims are prorated between rescheduling and forgiveness. (A2.53)

### Debt payments on behalf of others (definition and accounting)
- Definition: a government may repay a specific borrowing or make a payment on behalf of another institutional unit without the guarantee being called or the debt being assumed; the debt remains recorded in the balance sheet of the original legal debtor. This is not debt reorganization. (A2.54)
- Accounting depends on residency and whether payer receives a financial claim on the debtor:
  - If paying entity and original debtor are resident in the same economy, no BOP transactions are reported between them. (A2.56)
  - If in different economies and a claim is established, the paying economy records an increase in financial assets and a decrease in reserve assets or currency and deposits depending on funding source; otherwise, a capital transfer or direct investment–equity transaction is recorded. The payment is not recorded as interest or principal by the paying economy because payments are not related to a liability in its balance sheet. (A2.56)
  - If no financial claim is established and transactions arise from a BOP need, analytic presentation: debtor country records a credit entry below-the-line in transfers (other intergovernmental grants) under exceptional financing and a debit entry above-the-line reflecting any interest and principal payments made. (A2.57)

### Special cases
- Debt service falling due between Paris Club Agreed Minutes and implementation date:
  - Under Paris Club arrangements, Agreed Minutes may provide that payments falling due before the effective implementation date may not be paid on schedule while interest continues to accrue; such payments are considered technical arrears. Technical arrears are treated in the standard presentation of the debtor economy as rescheduled short-term debt and classified under other investment, other accounts receivable/payable, until the effective date of the bilateral agreement when new terms apply. Reclassification to appropriate instruments may be required when new terms apply. In the analytic presentation, debit entries are recorded above-the-line and corresponding credit entries are recorded below-the-line as accumulation of arrears in exceptional financing. (A2.58–A2.60)
- Debt service moratorium extended by creditors:
  - Debt service moratorium permits formal suspension of debt service payments falling due within a given period; may be granted for short-term relief (e.g., natural disasters or crises) and usually involves formal exchange of letters but not necessarily a formal bilateral agreement. Examples include relief under the G20 Debt Service Suspension Initiative during the COVID-19 pandemic and moratoria for tsunami-affected countries in 2005. (A2.61)
  - Classification: debt service moratorium extended by creditors should be classified as debt rescheduling if there is a formal process demonstrating agreement by both debtor and creditor (e.g., exchange of letters); in such instances, arrears are not created. Standard presentation: debtor records a debit entry under the appropriate instrument representing repayment of obligations as they fall due with a credit entry under the same instrument representing creation of a new debt. Analytic presentation: debit entries of obligations falling due in the current period are recorded above-the-line, and contra-entries are recorded as rescheduling of existing debt under other investment liabilities in exceptional financing. (A2.62)

*IMF BPM7 Annex 2: Debt conversion and debt prepayment (sections 3–5).*

### 1. New money facilities

### 1. New money facilities

### New money facilities (debt reorganization)
- In some debt reorganization arrangements to assist the debtor to overcome temporary balance of paymentsBOP difficulties, new money facilities are agreed with the creditor to be used to repay maturing debt obligations.
- Standard presentation:
  - Drawings on the new money facilities are recorded by the debtor as a credit.
  - Offsetting debit entries are made under the appropriate instrument, such as reserve assets.
  - As the maturing debt obligations are paid, debit entries are recorded under the debt instrument for principal amounts falling due and under income for interest accrued in the current period.
  - In the IIP the liabilities (assets) of the debtor (creditor) are increased by the new borrowing.
- Analytic presentation:
  - A credit entry for the full amount borrowed is recorded under drawings on new loans within exceptional financing, with the offsetting debit entry under reserve assets.
  - Scheduled debt payments out of the proceeds of the new borrowings are not regarded as exceptional financing; debit entries are made above-the-line and offsetting entries under reserve assets.
  - Advance repayments of debt for balance of paymentsBOP purposes from reserve assets are recorded as debit items under exceptional financing under the relevant financial instrument.
  - If the terms of the new borrowings are concessional, the creditor is providing a transfer to the debtor.
- Note: Debt concessionality is discussed below.

### Defeasance
- Defeasance is a technique by which a debtor exactly matches debt service outflows from a set of its liabilities with financial assets with the same debt service inflows, and removes both the asset and liabilities from its balance sheet.
- The Manual does not recognize defeasance as affecting the debt of the debtor as long as there has been no change in the legal obligations of the debtor.
- With defeasance, a debtor unit removes liabilities from its balance sheet by pairing them with financial assets, the income and value of which are sufficient to ensure that all debt-service payments are met.
- Implementation methods:
  - Placing the assets and liabilities in a separate account within the institutional unit concerned.
  - Transferring them to another unit.
- Macroeconomic statistical treatment:
  - Defeasance is not recognized as affecting the outstanding debt of the debtor; the debt should continue to be shown on the liabilities side and the financial assets recorded on the asset side of the balance sheet, and the transactions associated with those assets and liabilities recorded in the balance of paymentsBOP provided they are with nonresidents.
  - If a separate unit is created to hold the assets and liabilities and the second unit is resident of another economy, the transactions by which the assets and liabilities are moved to the second institutional unit are recorded in the financial account.
  - If the two units are resident in the same economy but are classified in different sectors, a reclassification in other changes in volume account is recorded.

### Debt write-offs
- A creditor can unilaterally decide to write off debt owed to it.
- No transactions are recorded, but the creditor economy records the reduction in its financial assets through the other changes in the volume of assets account.
- The corresponding liability should also be removed from the balance sheet of the debtor, through the other changes in volume account.

### Debt concessionality
- Definition:
  - Concessional loans are loans intentionally provided at a contractual interest rate below market interest rates, for similar grace and repayment periods as equivalent market loans, with the purpose to convey a benefit, occurring in a noncommercial context.
- Usage and importance:
  - Debt concessionality has gained increasing importance in discussions relating to debt relief to the heavily indebted poor countries.
  - There is no consistent definition or measure of debt concessionality in economic accounts.
- Paris Club practice:
  - In debt reorganization through the Paris Club, such as the Heavily Indebted Poor Countries Initiative and similar arrangements, debt reduction in present value terms is calculated using a market-based discount rate, usually the OECD’s Commercial Interest Reference Rate (CIRR).
  - The difference between the nominal value of the applicable debt and its present value is the amount of capital transfer derived from the debt reorganization arrangements.
- Supplementary recording recommended:
  - The transfer element for concessional lending is not recorded in the central framework of macroeconomic statistics, but economies are encouraged to provide these data as supplementary items for concessional loans provided in a nonmarket context (i.e., those provided by governments, central banks, and international organizations).
  - Where such transfers are significant, countries are encouraged to provide these data as a supplementary item to the standard components.
  - This supplementary recording should be made as a one-off transaction capital transfer at the point of loan origination equal to the difference between:
    - the present value of the cash flows discounted by the contractual interest rate and
    - the nominal value of the debt and its present value (using a relevant market discount rate such as the OECD’s Commercial Interest Reference Rate (CIRR)).
  - For a new loan, this approach requires information on the market interest rate at inception and the contractual interest rate—with the market interest rate as the discount rate and the difference the value of the transfer.
  - Advantages:
    - Considers all possible sources of transfers in debt concessionality—maturity period, grace period, frequency of payments, interest rate, and other applicable costs.
    - Reflects that the concessional element relates to an explicit policy decision to provide a lower interest rate at the start of the loan.
    - Is consistent with nominal valuation of loans and with the economic equivalence between a concessional loan of 100 units with an embedded grant element of 35 percent, and a commercial loan of 100 units combined with a direct grant of 35 units.
  - The transfer value is calculated at the time it happens, that is, at the inception of the debt, as the difference between its nominal value and its present value using the payment stream and the current market interest rate as the discount factor.
- If the loan is retired before maturity and replaced by a new loan:
  - Adjustment of the previously recorded transfers is required.
  - The value of any transfers not yet received on the original loan that is replaced would need to be subtracted from the original transfer value calculated; otherwise, the amount of concessionality recorded over time would be overstated.
  - This can be done by recalculating the transfer at inception using the actual payment schedule outturn, including the retirement of the entire remaining loan at the time of rescheduling.
  - The recalculated value should replace the originally calculated value in the historical supplementary series, so the historical data reflect the actual transfers received and do not mix any new concessional transfer with the value not received on the original loan, when there may have been a different set of market-related interest rates.

### Debt arising from off-market swaps
- General treatment:
  - In macroeconomic statistics, swaps give rise to financial derivatives, which are nondebt instruments. However, off-market swap contracts have a debt component.
- Definition and economic nature:
  - An off-market swap is a swap contract that has a nonzero value at inception as a result of having reference rates priced differently from current market values—that is, “off-the-market.”
  - Such a swap results in a lump sum being paid, usually at inception, by one party to the other.
  - The economic nature of an off-market swap contract is a combination of borrowing a debt (the lump sum nonzero value provided to/from the counterparty at inception), in the form of a loan, and an on-market swap (financial derivative).
  - The loan component of an off-market swap is debt and, if a public sector resident institutional unit receives the lump-sum payment loan component from a nonresident, this will be part of public sector external debt.
  - Examples of swap contracts that may involve off-market reference rates include interest rate and currency swaps.
- Balance sheet recording:
  - Two stock positions are recorded in the balance sheet:
    - A loan—a debt instrument—which is equal to the nonzero value of the swap contract at inception and with a maturity date equivalent to the expiration date of the swap.
    - A financial derivative (swap) component—a nondebt instrument—that has a market value of zero at inception.
  - If the swap involves an exchange of principals, this should be recorded at market value in the relevant item (most likely in currency and deposits).
  - The loan position is a liability of the party that receives the lump sum (i.e., the nonzero value of the swap contract at inception), while the derivative position may appear either on the financial asset or liability side, depending on market prices on the balance sheet date.
  - Future streams of flows relating to these stock positions are partitioned between those relating to the loan and financial derivative component, respectively.
- Off-market central bank swap arrangements:
  - Off-market central bank swap arrangements or other similar arrangements should be treated as an exchange of deposits with maintenance of value without any recordings in financial derivatives.

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-annex-2-v7-globcon.pdf_