## Chapter 8 Financial Account

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### A. Concepts and Coverage
- Reference: 2025 SNA, Chapter 12, Financial Account.
- Purpose: records all transactions in financial assets and liabilities between residents and nonresidents and indicates functional categories, sectors, instruments, and maturities used for net international financing transactions (paragraph [8.1]).
- Presentation convention: assets shown before liabilities in the IIP and general practice; liabilities may be shown first to emphasize double-entry recording (paragraph [8.1]).
- Corresponding entries: financial account entries correspond to goods, services, income, capital account, or other financial account entries; transactions may exchange one asset for another or create new asset–liability pairs (paragraph [8.2]).
- Net lending/net borrowing:
  - Overall financial account balance is net lending/net borrowing: net lending = economy supplies funds to the rest of the world; net borrowing = the opposite (paragraph [8.3]).
  - Net lending/net borrowing includes equity, financial derivatives, monetary gold, and debt instruments; can be derived from the sum of current and capital account balances or from the financial account balance (paragraph [8.3]).
  - Net lending/net borrowing of external accounts equals net lending/net borrowing for the sum of resident sectors of the national accounts (paragraph [8.3]).
- Component balances: analysts may present net transactions for functional categories (e.g., balance of direct investment = net acquisition of direct investment assets less net incurrence of direct investment liabilities) (paragraph [8.4]).
- Linkages: financial account and other changes in assets and liabilities account together explain changes between opening and closing stocks of financial assets and liabilities; consistent classifications improve transparency (paragraph [8.5]).
- Net acquisition vs. net changes: net acquisition of financial assets contributes to net changes in financial assets (wider scope includes other flows and valuation changes); analogous treatment for liabilities (paragraph [8.6]).

### Net recording
- Principle: net recording aggregates acquisitions of a particular asset or incurrences of a particular liability netted against disposals or repayments in the same type; do not net assets against liabilities except where explicitly allowed (paragraph [8.7]).
- Application: apply net recording at the lowest level of classification of financial instruments, accounting for functional category, institutional sector, maturity, and currency (paragraph [8.7]).
- Contrast: current and capital accounts are recorded on a gross basis (paragraph [8.7]).
- Rationale: recommended for analytical and pragmatic reasons because financial markets have large turnover and focus is on net changes; gross reporting may be impractical for some units/instruments (paragraph [8.8]).
- Supplementary gross data: where practical, gross flows (e.g., drawings and repayments on loans, acquisitions/disposals) can be provided on a supplementary basis, comprehensively or for particular components (paragraph [8.9]).

### Timing and valuation
- Time of recording: transactions recorded when economic ownership changes; for liabilities arising from non-financial transactions (e.g., trade credit), claim arises when the corresponding non-financial flow occurs (paragraph [8.10]).
- When ownership dates differ between parties, adopt a convention such as the date the creditor receives payment if no precise date can be fixed (paragraph [8.11]).
- Valuation: transactions are recorded at market prices (paragraph [8.12]; see [3.68–3.80], market prices defined in [3.70]).
- Prices recorded exclusive of commissions, fees, service charges, regulatory levies, and taxes; commissions and dealers’ margins recorded as services (paragraph [8.13]).
- Buyer and seller should record transactions at the same mid-price (midpoint between buyer’s price and seller’s price) (paragraph [8.13]).

### B. Direct Investment — key issues and treatments
- Directional principle and classification: direct investment defined in paragraphs [6.8–6.24]; presentation according to the directional principle (paragraph [8.14]).
- Reinvestment of earnings: recorded as an imputed financial account entry equal to reinvested earnings in the earned income account; shown separately under direct investment equity (paragraph [8.15]).
  - Reinvested earnings may be negative (enterprise losses or dividends payable exceeding net earnings); negative reinvested earnings treated as withdrawal of equity (paragraph [8.16]).
- Dividends and withdrawal of equity: distributions from accumulated reserves from ordinary earnings treated as dividends; exceptional distributions related to asset sales and liquidating dividends recorded as withdrawals of equity (paragraph [8.16a]).
- Flows in kind: goods, services, and resources supplied between affiliates at non-market prices or without payment may be treated as building up direct investor’s equity when motivation is unclear; when valued, the difference between market value and charged price recorded as direct investment equity transactions (paragraph [8.17]).
- Mergers and acquisitions: mergers (combining companies) and acquisitions (purchase of company or group) are not standard components within direct investment but may be of interest; may be differentiated from greenfield investment or capacity extension (paragraph [8.18]).
- Corporate inversion and restructuring: corporate inversion involves restructuring so original ultimate controlling parent becomes subsidiary of a new parent in another economy via transactions in assets; can lead to recorded financial transactions and may span periods; some restructuring types may involve entity appearance/disappearance (paragraph [8.19]).

### Borrowing for fiscal purposes (government-related special rules)
- Residency and purpose: entities owned/controlled by general government but resident in another territory are resident in their economy of incorporation/registration; fiscal purposes refer to motivation serving the government’s home territory (paragraph [8.24]).
- Accounting entries when a resident entity borrows on behalf of a foreign government (paragraph [8.25]):
  - (a) At borrowing: borrowing entity records liability in instrument borrowed; an imputed debt liability of the government equal to the borrowing is created, with corresponding increase in government’s equity in borrowing entity and increase in equity liabilities for the borrowing entity.
  - (b) When funds passed to government: transaction shown and matched by reduction of government’s equity in the borrowing entity by the same amount.
  - (c) When expenses/revenues/funds provided to a third party (not passed to government): an imputed transaction between government and entity is recorded, with matching entry as withdrawal or increase in government equity; imputed transaction recorded according to its nature (e.g., interest expenditure on imputed government debt, government revenue, current or capital transfer, or acquisition of assets).
- Symmetry and effect: entries made symmetrically for government and borrowing entity and do not affect transactions or positions between the borrowing entity and its creditors/third parties (paragraphs [8.25–8.26]).
- Rationale: avoids misleading pictures of government expenditure, revenue, and debt because the nonresident entity acts for public policy, not commercial purposes (paragraph [8.26]).

### C. Portfolio Investment — specific treatments
- Definition: portfolio investment defined in paragraphs [6.54–6.57] (paragraph [8.27]).
- Reinvestment of earnings in investment funds: undistributed earnings imputed as payable to owners and reinvested in the fund; corresponding financial account entry equals reinvested earnings in the earned income account (paragraph [8.28]).
  - Treatment follows same approach as reinvested earnings of direct investment enterprises; reinvested earnings may be negative (paragraph [8.28]).
- Superdividends: large irregular payments funded from accumulated reserves or asset sales; portion exceeding distributable income recorded as superdividend under withdrawal of equity, remainder as dividend; if distributable income is negative, entire payout recorded as superdividend (paragraph [8.28a]).
  - Distributable income includes net income from production, net property income, and net transfers (paragraph [8.28a]).
- Convertible bonds: upon exercise of conversion option, show two entries: (a) redemption of the bond and (b) issue or acquisition of shares (paragraph [8.29]).
- Debt defeasance: debtor removes certain liabilities by pairing irrevocably assets of equal value with the liabilities (paragraph [8.30]).
  - Approaches:
    - (a) Pairing within same institutional unit’s trust account: no transactions recorded; assets and liabilities remain on unit’s balance sheet.
    - (b) Transferring to another institutional unit: record transactions in financial account of relevant economies if residency differs; liabilities then appear on second unit’s balance sheet (paragraph [8.31]).

### Share and debt buybacks
- Share buybacks (paragraph 8.32): if a corporation buys its own shares, classify as reduction in equity liability rather than acquisition of an asset; liability deemed extinguished even if shares not canceled.
- Debt buybacks (paragraph 8.32): purchase of a debt security by its issuer is treated as redemption of the debt.
- Bonus shares (paragraph 8.33): stock splits or issue of bonus shares involve no new resources and therefore no transaction is recorded; issuance of new shares for additional funds is a recorded transaction.

### Financial derivatives (other than reserves) (paragraphs 8.34–8.40)
- Scope: financial derivatives and ESOs defined in paragraphs [6.58–6.60]; transactions may arise at inception, on secondary markets, with ongoing servicing, margin payments, and at settlement.
- Recording conventions:
  - Prefer separate presentation for assets and liabilities; net recording acceptable where separate data not available (see paragraph [A7.45]).
  - Explicit or implicit service charges should be deducted from derivative value; if implicit charges cannot be distinguished, classify entire value as the financial asset.
- At inception (paragraph 8.35):
  - (a) Creation of forward-type contracts generally does not require recording a transaction because risk exposures of equal value are usually exchanged, resulting in zero exposure and zero value; in some cases a nonzero transaction value may arise.
  - (b) Option purchaser pays a premium to seller (acquisition price); if premium paid after inception, record at inception and show financed by accounts receivable/payable between seller and purchaser.
- Subsequent valuation and secondary market sales: subsequent price changes recorded as holding gains/losses (revaluations, paragraphs [9.30–9.31]); sales of options in secondary markets valued at market prices and recorded as transactions in financial derivatives.
- Ongoing servicing and margins (paragraphs 8.38–8.39):
  - Cash payments received generally decrease (increase) a derivative asset (liability) if contract is in asset (liability) position at payment time; if market practice prevents this, record cash receipts as reductions in financial assets and cash payments as decreases in liabilities.
  - Repayable margins in cash classified as deposits, loans, or other accounts receivable/payable; nonrepayable margins classified as financial derivatives.
- Settlement (paragraph 8.40):
  - (a) Cash settlement: record a transaction equal to the cash settlement value; cash receipt typically reduces a derivative asset, cash payment reduces a derivative liability.
  - (b) Delivery of underlying item: record two transactions — the underlying item at market price under its relevant heading, and the derivative at (market price − strike price) × quantity.
  - (c) When multiple contracts are settled together with the same counterparty, record assets and liabilities separately where possible; net settlements acceptable when gross reporting impractical.

### Employee stock options (ESOs) (paragraph 8.41)
- Creation: ESO created on grant date, giving employee right to purchase employer shares at a strike price at vesting or during exercise period.
- Recording: transactions in ESOs recorded in the financial account as corresponding entry to remuneration of employees (paragraph [11.20]) or direct investment (paragraph 11.21).
- Exercise: when exercised, record transaction at value reflecting difference between market price of equity and price paid by buyer.
- Special case: if subsidiary employee issued parent-company options, subsidiary shown as acquiring option from parent; if no realistic payment, a value may be imputed (possibly as direct investment) (see paragraph [11.101]).
- Cancellation and revaluations: cancellation discussed in paragraph [9.12]; revaluations in paragraph [9.30].

### One-off guarantees and debt assumption (paragraphs 8.42–8.45; Box 8.1)
- Debt assumption: trilateral agreement among creditor, former debtor, and new debtor where new debtor assumes former debtor’s liability and is liable for repayment; can be under preexisting guarantee or otherwise.
- One-off guarantees: recognized as financial assets and liabilities only when activated (see paragraph [5.68]).
- Time of recording: under accrual principle, assumption recorded when guarantee is activated, not when payments actually made; repayments and interest by new debtor recorded as they occur.
- Recording variations (paragraph 8.45):
  - All cases: debt-assuming party records creation of new liability to creditor.
  - (a) If assumer does not acquire claim on original debtor because original debtor no longer exists: record a capital transfer from assumer to creditor; original debt written off in both original debtor and creditor accounts.
  - (b) If assumer does not acquire claim because assumer seeks to benefit the debtor (e.g., government assistance): record a capital transfer from assumer to original debtor and extinguish creditor’s claim on original debtor (unless in a direct investment relationship).
  - (c) If assumer acquires a claim on original debtor (as debt or increase in equity): record that claim and extinguish creditor’s claim on original debtor.
- Box 8.1: provides double-entry illustrations for original debtor, assumer, creditor entries.

### Insurance technical reserves, pension entitlements, and standardized guarantees (paragraphs 8.46–8.49)
- Requirement: transactions must be broken down into service, income, transfer, and financial account elements; Annex 8 overviews insurance and pension scheme treatment.
- Nonlife insurance technical reserves: include prepayments of premiums and outstanding claims; when policies surrendered by mutual agreement, reduction in insurers’ technical reserve liabilities equals unearned premiums returned and is recorded as a transaction; corresponding reductions in policyholders’ insurance technical reserve assets recorded.
- Life insurance, pension schemes, annuity funds, standardized guarantees: changes in technical reserves due to transactions recorded in the financial account as amounts of estimated obligations to beneficiaries accrued during the period; pension entitlements include funded and unfunded schemes but exclude potential benefits under social security schemes (paragraph [5.67]).
- Data sources and allocation: totals for technical reserves and related investment income usually identifiable only in providers’ accounts; allocation between resident and nonresident policyholders may require indicators (e.g., premiums payable).
- Valuation changes: changes due to holding gains/losses are revaluations, not transactions.

### Special drawing rights (SDRs) (paragraphs 8.50–8.51)
- Allocation of SDRs to IMF members: shown as incurrence of a liability of the recipient under SDRs in other investment, with a corresponding entry under SDRs in reserve assets.
- Other acquisitions and sales of SDRs: shown as transactions in reserve assets.

### Securities repurchase agreements and reverse transactions (paragraph 8.52)
- Treatment: because risks and rewards of ownership generally remain with original owner, no transaction in the security itself is recorded.
- Cash provision: provision of cash repayable when the security is returned is classified as a loan (except when it is a liability of a deposit-taking corporation and part of broad money, in which case it is classified as other deposits).

### Currency (paragraph 8.53)
- Issued banknotes and coins: transactions recorded under currency and deposits.
- Residents’ transactions with nonresidents using domestically issued banknotes/coins: recorded as transactions in liabilities; using foreign-issued banknotes/coins are transactions in assets.
- Transactions in domestically issued liabilities between nonresidents: not recorded in financial account of the balance of payments; transactions in foreign-issued assets between residents recorded in the other changes in financial assets and liabilities account as reclassifications between domestic institutional sectors when applicable.

### Change of contractual terms (paragraph 8.54)
- Renegotiation that changes original terms of debt (loan or debt security): treated as repayment of the original liability and creation of a new liability.
- If original contract terms provide that maturity or interest rate terms change as result of an event (default, credit rating decline), the change is treated as a reclassification.
- Distinction affects net values when principal, instrument classification, or maturity classification differ between original and new terms.

### Reserve assets (paragraphs 8.55–8.57)
- Monetary gold: transactions recorded in the financial account only if between two monetary authorities for reserve purposes or between a monetary authority and an international financial organization.
- Gold bullion other than monetary gold: recorded as non-monetary gold in the goods account.
- Unallocated gold account transactions: recorded under reserve assets only if between two monetary authorities for reserve purposes or between a monetary authority and an international financial organization; otherwise classified as currency and deposits.
- Financial account transactions with the IMF: involve reserve assets, reserve-related liabilities, other investment, and off-balance-sheet liabilities (Annex 9).

### Arrears (paragraphs 8.58–8.59)
- Exceptional-financing arrears: accumulation of arrears related to exceptional financing should be included as a memorandum item to the financial account; incurring arrears is a unilateral act and does not itself involve a transaction.
- Renegotiated debt: if debt is renegotiated, original instrument is extinguished and a new instrument is created, which should be recorded as transactions in the financial account.
- Other arrears: may be shown as supplementary items to indicate potential or actual debt-servicing problems.

*Source: IMF, BPM7 Chapter 8 Financial Account.*

### Chapter 8 Financial Account

### Chapter 8 Financial Account

### A. Concepts and Coverage
- Reference: 2025 SNA, Chapter 12, Financial Account.
- The financial account records all transactions in financial assets and liabilities between residents and nonresidents and indicates functional categories, sectors, instruments, and maturities used for net international financing transactions (paragraph [8.1]).
- Presentation conventions:
  - Assets are shown before liabilities in the IIP and general practice, though liabilities could be shown first to emphasize double-entry recording (paragraph [8.1]).
- Corresponding entries:
  - Financial account entries correspond to goods, services, income, capital account, or other financial account entries; transactions may involve exchanges of one asset for another or the creation of new asset–liability pairs (paragraph [8.2]).
- Net lending/net borrowing:
  - The overall balance on the financial account is called net lending/net borrowing: net lending means the economy supplies funds to the rest of the world; net borrowing means the opposite (paragraph [8.3]).
  - Net lending/net borrowing includes equity, financial derivatives, and monetary gold as well as debt instruments and can be derived from the sum of current and capital account balances or from the financial account balance (paragraph [8.3]).
  - Net lending/net borrowing of external accounts equals net lending/net borrowing for the sum of resident sectors of the national accounts (paragraph [8.3]).
- Component balances:
  - Analysts may show net transactions for functional categories (e.g., balance of direct investment = net acquisition of direct investment assets less net incurrence of direct investment liabilities) (paragraph [8.4]).
- Linkages:
  - The financial account and other changes in assets and liabilities account together explain changes between opening and closing stocks of financial assets and liabilities; consistent classifications improve transparency (paragraph [8.5]).
- Net acquisition vs. net changes:
  - Net acquisition of financial assets contributes to net changes in financial assets (wider scope includes other flows and valuation changes); analogous treatment for liabilities (paragraph [8.6]).

### Net recording
- Net recording principle:
  - Net recording aggregates all acquisitions of a particular asset or incurrences of a particular liability netted against disposals or repayments in the same type; do not net assets against liabilities except where explicitly allowed (paragraph [8.7]).
  - Apply net recording at the lowest level of classification of financial instruments, accounting for functional category, institutional sector, maturity, and currency (paragraph [8.7]).
  - Contrast: current and capital accounts are recorded on a gross basis (paragraph [8.7]).
- Rationale:
  - Net recording is recommended for analytical and pragmatic reasons because financial markets have large turnover and focus is on net changes; gross reporting may be impractical for some units/instruments (paragraph [8.8]).
- Supplementary gross data:
  - Where practical, gross flows (e.g., drawings and repayments on loans, acquisitions/disposals) can be provided on a supplementary basis, comprehensively or for particular components (paragraph [8.9]).

### Timing and valuation
- Time of recording:
  - Transactions in financial assets are recorded when economic ownership changes; for liabilities arising from non-financial transactions (e.g., trade credit), the claim arises when the corresponding non-financial flow occurs (paragraph [8.10]).
  - If ownership change dates differ between parties, adopt a convention such as the date the creditor receives payment if no precise date can be fixed (paragraph [8.11], including float considerations).
- Valuation:
  - Financial account transactions are recorded at market prices (paragraph [8.12]; see [3.68–3.80], with market prices defined in [3.70]).
  - Prices should be recorded exclusive of commissions, fees, service charges, regulatory levies, and taxes; commissions and dealers’ margins are recorded as services, not included in instrument prices (paragraph [8.13]).
  - Buyer and seller should record transactions at the same mid-price (midpoint between buyer’s price and seller’s price) (paragraph [8.13]).

### B. Direct Investment — key issues and treatments
- Directional principle and classification:
  - Direct investment defined in paragraphs [6.8–6.24]; presentation according to the directional principle discussed in paragraphs [6.42–6.45] and Box [6.4] (paragraph [8.14]).
- Reinvestment of earnings:
  - Reinvestment of earnings is recorded as an imputed financial account entry equal to reinvested earnings in the earned income account; shown separately under direct investment equity (paragraph [8.15]).
  - Reinvested earnings may be negative (e.g., enterprise losses or dividends payable exceeding net earnings); negative reinvested earnings treated as withdrawal of equity (paragraph [8.16]).
- Dividends and withdrawal of equity:
  - The concept of superdividends does not apply to direct investment in the standard presentation because distributions from accumulated reserves from ordinary earnings are treated as dividends; exceptional distributions related to asset sales and liquidating dividends should be recorded as withdrawals of equity (paragraph [8.16a]; see also paragraphs [12.XX]).
- Direct investment flows in kind:
  - Goods, services, and resources supplied between affiliates at non-market prices or without payment may be treated as building up direct investor’s equity when motivation is unclear; when valued, the difference between market value and charged price should be recorded as direct investment equity transactions (paragraph [8.17]; see [3.77–3.78, 10.35, 11.101–11.102]).
- Mergers and acquisitions:
  - Mergers (combining companies) and acquisitions (purchase of company or group) are not standard components within direct investment but may be of interest; they may not provide new financing and can be differentiated from greenfield investment or extensions of capacity (paragraph [8.18]; see OECD Benchmark Definition of Foreign Direct Investment, [Annex 9] and Annex 6).
- Corporate inversion and restructuring:
  - Corporate inversion: restructuring where the original ultimate controlling parent becomes subsidiary of a new parent in another economy; achieved by transactions in assets between entities rather than a single entity changing residence, resulting in recorded financial transactions (paragraph [8.19]).
  - Corporate inversions may span periods and can lead to transactions recorded in the financial account; some restructuring types may involve entity appearance/disappearance. Corporate inversions are described in Annex 6; data may be published on a supplementary basis (paragraph [8.19]).

### Borrowing for fiscal purposes (government-related special rules)
- Residency and purpose:
  - Entities owned or controlled by general government but resident in another territory are resident in their economy of incorporation/registration, not the government’s economy; fiscal purposes refer to motivation serving the government’s home territory (paragraph [8.24]; see [4.134–4.135], [4.91–4.92]).
- Accounting entries when a resident entity borrows on behalf of a foreign government for fiscal purposes (paragraph [8.25]):
  - (a) At the time of borrowing: borrowing entity records liability in instrument borrowed (e.g., increase in debt security liabilities); an imputed debt liability of the government equal to the borrowing is created, with a corresponding increase in the government’s equity in the borrowing entity and an increase in equity liabilities for the borrowing entity.
  - (b) When funds/resources are passed to the government: transaction shown and matched by reduction of the government’s equity in the borrowing entity by the same amount.
  - (c) When expenses are incurred, revenues made, or funds provided to a third party (not passed to the government): an imputed transaction between government and entity is recorded, with matching entry as withdrawal or increase in government equity; imputed transaction recorded according to its nature (e.g., interest expenditure on imputed government debt, government revenue, current or capital transfer, or acquisition of assets).
  - Entries are made symmetrically for government and borrowing entity and do not affect transactions or positions between the borrowing entity and its creditors/third parties (paragraphs [8.25–8.26]).
- Rationale:
  - Special approach avoids misleading pictures of government expenditure, revenue, and debt because the nonresident entity acts for public policy, not commercial purposes (paragraph [8.26]).

### C. Portfolio Investment — specific treatments
- Definition:
  - Portfolio investment defined in paragraphs [6.54–6.57] (paragraph [8.27]).
- Reinvestment of earnings in investment funds:
  - Undistributed earnings of portfolio investment in investment funds are imputed as payable to owners and reinvested in the fund; financial account entry corresponds to reinvested earnings in the earned income account (paragraph [8.28]).
  - Treatment and calculation of earnings follow the same approach as reinvested earnings of direct investment enterprises; reinvested earnings may be negative (e.g., dividends paid out of realized holding gains or payment of earnings accrued in previous periods) (paragraph [8.28]).
- Superdividends:
  - Superdividends are large irregular payments funded from accumulated reserves or asset sales; portion exceeding distributable income recorded as superdividend under withdrawal of equity, remainder recorded as dividend; if distributable income is negative, entire payout is recorded as superdividend (paragraph [8.28a]).
  - Distributable income includes net income from production, net property income, and net transfers (paragraph [8.28a]; see paragraph [12.XX]).
- Convertible bonds:
  - When bond conversion option is exercised, show two entries: (a) redemption of the bond and (b) issue or acquisition of shares (paragraph [8.29]).
- Debt defeasance:
  - Defeasance allows a debtor to remove certain liabilities by pairing irrevocably assets of equal value with the liabilities (paragraph [8.30]).
  - Two approaches:
    - (a) Pairing assets and liabilities within the same institutional unit’s trust account: no transactions recorded; assets and liabilities remain on the unit’s balance sheet.
    - (b) Transferring assets and liabilities to another institutional unit: record transactions in the financial account of relevant economies if units are resident in different economies; liabilities then appear on the second unit’s balance sheet. Defeasance can change which institutional unit records liabilities (paragraph [8.31]).

*Chapter 8 Financial Account.*

### 5. Share and debt buybacks

### 5. Share and debt buybacks

### Share and debt buybacks (paragraph 8.32)
- If a corporation buys its own shares, the transaction is classified as a reduction in the equity liability rather than an acquisition of an asset because a corporation cannot have a claim on itself; the liability is deemed to be extinguished even if the shares are not canceled.
- Purchase of a debt security by its issuer is treated as redemption of the debt.

### Bonus shares (paragraph 8.33)
- Stock splits or the issue of bonus shares (offering shareholders new shares for each share previously held) involve no new resources and therefore no transaction is recorded.
- This contrasts with issuance of new shares in return for additional funds, which would be a recorded transaction.

### Financial derivatives (other than reserves) (paragraphs 8.34–8.40)
- Definitions and scope:
  - Financial derivatives and ESOs are defined in paragraphs [6.58–6.60].
  - Transactions may arise at inception, on secondary markets, with ongoing servicing, margin payments, and at settlement.
- Recording conventions:
  - Financial account entries for derivatives preferably should be shown separately for assets and liabilities; recording on a net basis is acceptable where separate data are not available (see paragraph [A7.45]).
  - Any explicit or implicit service charges should be deducted from the value of the derivative; when implicit charges cannot be distinguished, the entire value is classified as for the financial asset.
- At inception (paragraph 8.35):
  - (a) Creation of forward-type contracts generally does not require recording a transaction because risk exposures of equal value are usually exchanged, resulting in zero exposure and zero value for both sides; in some cases a nonzero transaction value may arise.
  - (b) The purchaser of an option pays a premium to the seller, which is the acquisition price; if premium is paid after inception, it is recorded at inception and shown as financed by accounts receivable/payable between seller and purchaser.
- Subsequent valuation and secondary market sales:
  - Subsequent price changes are recorded as holding gains or losses (revaluations, paragraphs [9.30–9.31]).
  - Sales of options in secondary markets are valued at market prices and recorded as transactions in financial derivatives.
- Ongoing servicing and margins (paragraphs 8.38–8.39):
  - For contracts requiring ongoing servicing, cash payments received generally decrease (increase) a derivative asset (liability) if the contract is in an asset (liability) position at payment time; if market practice prevents this, all cash receipts should be recorded as reductions in financial assets and cash payments as decreases in liabilities.
  - Margins: repayable margins in cash are classified as deposits, loans, or other accounts receivable/payable as appropriate; nonrepayable margins are classified as financial derivatives.
- Settlement (paragraph 8.40):
  - (a) Cash settlement: record a transaction equal to the cash settlement value; cash receipt typically reduces a derivative asset, cash payment reduces a derivative liability.
  - (b) Delivery of underlying item: record two transactions — the underlying item at market price under its relevant heading, and the derivative at (market price − strike price) × quantity.
  - (c) When multiple contracts are settled together with the same counterparty, record assets and liabilities separately where possible; net settlements acceptable when gross reporting is impractical.

### Employee stock options (ESOs) (paragraph 8.41)
- An ESO is created on the grant date, giving an employee the right to purchase employer shares at a strike price at vesting or during an exercise period.
- Transactions in ESOs are recorded in the financial account as the corresponding entry to remuneration of employees (paragraph [11.20]) or direct investment (paragraph 11.21).
- When exercised, the ESO transaction is recorded at the value reflecting the difference between the market price of the equity and the price paid by the buyer.
- Special case: if an employee of a subsidiary is issued options for parent-company stock, the subsidiary is shown as acquiring the option from the parent; if no realistic payment is made, a value may be imputed (possibly as direct investment) as discussed in paragraph [11.101] on transfer pricing.
- Cancellation and revaluations: cancellation discussed in paragraph [9.12]; revaluations in paragraph [9.30].

### One-off guarantees and debt assumption (paragraphs 8.42–8.45; Box 8.1)
- Debt assumption is a trilateral agreement among creditor, former debtor, and new debtor whereby the new debtor assumes the former debtor’s liability and is liable for repayment; debt may be assumed under a preexisting guarantee or otherwise.
- One-off guarantees are recognized as financial assets and liabilities only when activated (see paragraph [5.68]).
- Time of recording: under the accrual principle, assumption of debt is recorded when the guarantee is activated, not when payments are actually made; repayments and interest by the new debtor are recorded as they occur.
- Recording variations (paragraph 8.45):
  - In all cases the debt-assuming party records creation of a new liability to the creditor.
  - (a) If the assumer does not acquire a claim on the original debtor because the original debtor no longer exists, record a capital transfer from assumer to creditor; original debt is written off in both original debtor and creditor accounts.
  - (b) If the assumer does not acquire a claim because the assumer seeks to benefit the debtor (e.g., government assistance), record a capital transfer from assumer to original debtor and extinguish the creditor’s claim on the original debtor (unless in a direct investment relationship).
  - (c) If the assumer acquires a claim on the original debtor (as debt or increase in equity), record that claim and extinguish the creditor’s claim on the original debtor.
- Box 8.1 provides the double-entry illustrations for the three situations (original debtor, assumer, creditor entries).

### Insurance technical reserves, pension entitlements, and standardized guarantees (paragraphs 8.46–8.49)
- Transactions must be broken down into service, income, transfer, and financial account elements; Annex 8 provides an overview of insurance and pension scheme treatment.
- Nonlife insurance technical reserves: prepayments of premiums and outstanding claims; when policies are surrendered by mutual agreement, reduction in insurers’ technical reserve liabilities equals unearned premiums returned and is recorded as a transaction; corresponding reductions in policyholders’ insurance technical reserve assets are recorded.
- Life insurance, pension schemes, annuity funds, standardized guarantees: changes in technical reserves due to transactions are recorded in the financial account as amounts of estimated obligations to beneficiaries accrued during the period; pension entitlements include funded and unfunded schemes but exclude potential benefits under social security schemes (paragraph [5.67]).
- Totals for technical reserves and related investment income are usually identifiable only in providers’ accounts; allocation between resident and nonresident policyholders may require indicators (e.g., premiums payable); changes due to holding gains/losses are revaluations, not transactions.

### Special drawing rights (SDRs) (paragraphs 8.50–8.51)
- Allocation of SDRs to IMF members is shown as incurrence of a liability of the recipient under SDRs in other investment, with a corresponding entry under SDRs in reserve assets.
- Other acquisitions and sales of SDRs are shown as transactions in reserve assets.

### Securities repurchase agreements and reverse transactions (paragraph 8.52)
- Because risks and rewards of ownership generally remain with the original owner, no transaction in the security itself is recorded.
- Provision of cash that is repayable when the security is returned is classified as a loan (except when it is a liability of a deposit-taking corporation and part of broad money, in which case it is classified as other deposits).

### Currency (paragraph 8.53)
- Transactions in issued banknotes and coins are recorded under currency and deposits.
- Transactions by residents with nonresidents using domestically issued banknotes/coins are recorded as transactions in liabilities; transactions using foreign-issued banknotes/coins are transactions in assets.
- Transactions in domestically issued liabilities between nonresidents are not recorded in the financial account of the balance of payments; transactions in foreign-issued assets between residents are recorded in the other changes in financial assets and liabilities account as reclassifications between domestic institutional sectors when applicable.

### Change of contractual terms (paragraph 8.54)
- Renegotiation that changes the original terms of debt (loan or debt security) is treated as repayment of the original liability and creation of a new liability.
- If original contract terms provide that maturity or interest rate terms change as a result of an event (default, credit rating decline), the change is treated as a reclassification.
- The distinction affects net values when principal, instrument classification, or maturity classification differ between original and new terms.

### Reserve assets (paragraphs 8.55–8.57)
- Monetary gold transactions are recorded in the financial account only if between two monetary authorities for reserve purposes or between a monetary authority and an international financial organization.
- Gold bullion transactions other than monetary gold are recorded as non-monetary gold in the goods account.
- Unallocated gold account transactions are recorded under reserve assets only if between two monetary authorities for reserve purposes or between a monetary authority and an international financial organization; otherwise they are classified as currency and deposits.
- Financial account transactions with the IMF involve reserve assets, reserve-related liabilities, other investment, and off-balance-sheet liabilities (Annex 9).

### Arrears (paragraphs 8.58–8.59)
- Accumulation of arrears related to exceptional financing should be included as a memorandum item to the financial account; incurring arrears is a unilateral act and does not itself involve a transaction.
- If debt is renegotiated, the original instrument is extinguished and a new instrument is created, which should be recorded as transactions in the financial account.
- Other arrears may be shown as supplementary items to indicate potential or actual debt-servicing problems.

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-ch8.pdf_