## Guidance Note — Debt Concessionality

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### Background
- BPM6 and the 2008 SNA identify debt concessionality as a topic for research (BPM6, paragraph 1.43 (h); 2008 SNA, paragraph A4.44).
- Concessional loans: lending intentionally provided at a contractual interest rate below market interest rates, for similar grace and repayment periods, with the purpose to convey a benefit, occurring in a non-commercial context (BPM6, paragraphs 3.79 and 12.51; 2008 SNA, paragraphs 3.131, 3.134, 22.123, and 22.124; GFSM 2014, paragraphs 3.123 and A3.39-41).
- Concessionality may also arise through more favorable grace and maturity periods (2008 SNA paragraph 22.123, BPM6 A2.68, EDS Guide paragraph 6.22).
- GN scope: restricted to low interest loans provided in a non-commercial context, including entities acting on behalf of others, with an intention to convey a benefit; includes grant element treatment when concessional loans substitute regular contributions and appropriate discount-rate guidance (Annexes II and III).
- Lenders with very low average funding costs (e.g., some development agencies) may not be considered concessional lenders under the GN because they have very low funding costs.
- GN relates to GN F.9 “Valuation of Loans (Fair Value)” but focuses on valuation at inception rather than re-estimates.

### Issue 1 — Statistical treatment of concessional lending: options and assessment
- Core observation: manuals acknowledge a transfer/grant element but typically record it only as a memorandum/supplementary item while balance sheets record loans at face/nominal value at inception (2008 SNA paragraphs 7.54 and 22.123-4; ESA 2010 paragraph 20.241–2; BPM6 paragraphs 12.51 and 13.33; GFSM 2014 paragraphs 6.17, 7.246 and A.340).
- Consequence: mismatch between manual references to a transfer and lack of uniform core-account recording; implied transfer affects net lending/net borrowing indirectly and does not properly reflect time value of money.
- Options for recording concessional loans:
  - Option A: No change — record at face/nominal value at inception; transfer element as memorandum item/supplementary information.
    - Sub-option A1: No change in core accounts but require more detailed memorandum/supplementary information (e.g., fair value and accrued interest).
  - Option B: Record at face value at inception, but recognize the transfer element in core accounts spread over time by increasing interest earned (D.41) using a suitable non-concessional rate together with a matching transfer expense (deficit neutral in every accounting period).
  - Option C: Partition at inception between a loan element (F.4) and an explicit transfer element; later impute interest receivable (D.41) on the loan so the nominal value grows to face value before maturity (deficit neutral across life of loan).
- GN recommendation: Option C, because:
  - Consistent with time value of money.
  - Partitioning at inception follows substance over form and aligns with IPSAS.
  - Memorandum items already refer to recording transfer at inception (BPM6, paragraph 12.51).
  - Option C avoids regular re-estimates of discount rate/loan value during loan lifetime and is consistent with valuation of normal loans.

### Numerical example illustrating Options A, B, and C (bullet loan)
- Creditor grants on January 1 a bullet-loan (5 years, redeemed on December 31):
  - Contractual interest rate: zero
  - Loan amount (face value): 100 Units
  - Discount rate applied (creditor’s average funding rate): 5 percent
- Net present value at inception of {0, 0, 0, 0, 100} discounted at 5 percent: 78.4 U.
- Transfer recorded at inception under Option C: 21.6 (=100-78.4).
- Note: At end Year 5, just before redemption, instrument is valued at face value 100 in all Options.
- Comparative outcomes:
  - Option B accrues interest of 5 U (= 5 percent of 100) each year on nominal 100 U, producing a larger cumulated transfer than Option C.
  - All three options have the same cumulated deficit impact over the full life of the instrument; stock before redemption equals 100 U across options.
- Other loan form example (constant annuity of 20 U, 5 years, zero interest, discount rate 5 percent):
  - Face value: 100 U.
  - Option C partitions into:
    - Loan element: 86.6 U (NPV of {20,20,20,20,20} at 5 percent).
    - Grant/transfer element: 13.4 U.
  - Imputed interest amounts differ between Options B and C because Option B accrues interest on initial nominal 100 U; Option C accrues on initial nominal 86.6 U.
- Creditor with own financing costs example (creditor incurs a 5-year liability at market interest 5 percent with constant annuities {23.1, 23.1, 23.1, 23.1, 23.1}):
  - Creditor interest funding costs cumulate to 15.5 U over the years.
  - All three options have the same cumulated deficit impact for creditor of 15.5 U.
  - Under Option C creditor shows a one-off inception impact of 13.4 U in the constant annuity case with smoother subsequent deficit profile.

### Discount-rate issue for measuring transfer component
- Possible discount-rate approaches: creditor’s observed funding cost, OECD’s Commercial Interest Reference Rates (CIRR), or borrower’s funding cost.
- GN recommends using the average cost of the grantor/creditor as discount rate (conservative): creditor lending below its own funding terms is undisputable evidence of benefit.
- CIRR noted as observable, generally fairly low, and aligned with macroeconomic statistics manuals.

### Sale/resale consequences and rationale for Option C (Annex VIII and related)
- Rapid resale at a steep discount can allow Options A, A1, and B to fail to record transfer in core deficit because resale difference is treated as revaluation; ESA 2010 requires capital transfer expenditure at resale for government-to-government loan sales at a loss unless difference reflects risk-free rate changes.
- GN favors recording transfer at inception (Option C) to avoid recognizing benefit only at resale and to prevent deficit impact escaping core accounts.
- Representative numeric scenario (Annex VIII):
  - 5-year bullet loan of 100, discount rate 5 percent.
  - Sale/NPV at inception of concessional loan: 78.35.
  - Gift element: 21.65.
  - Creditor issues a 5-year zero coupon bond with face value 127.63 issued at 100.
  - Cumulated B.9 (total interest costs) when asset held to maturity: -27.63.
  - Cumulated B.9 in lend-and-sell under Option A: -5.98 (i.e., much of gift element evades deficit under Option A).
- GN conclusion: Options A and B can distort net lending/net borrowing in case of secondary sale; Option C does not.

### Consultation outcomes and AEG decisions
- FITT consultation on Issue 1: majority support for Option C; Options A/A1 rejected for failing to capture transfers in core accounts; preference for Option C over Option B as it recognizes transfer at inception and provides present value consistency.
- FITT consultation on Issue 2: majority support for Option B (explicitly recording grant/transfer element as substitute for regular contributions), with some members favoring guidance for beneficiary institutions or reserving details to compilation manuals.
- October 2022 Joint Committee and AEG meeting agreed:
  - Never record a transfer element for concessional lending in the “central framework” of national accounts and external sector statistics, except for concessional loans provided by employers to employees.
  - Remove the exception for loans/deposits by central banks present in 2008 SNA and GFSM 2014.
  - Classify transfer element for concessional loans provided by employers to employees as a continuous stream of current transfers in the “central framework” and classify concessional loans provided in a non-market context (for supplementary tables) as capital transfers at inception.

### Issue 2 — Concessional loans substituting contributions to agencies
- Practice: governments sometimes give long-term zero-interest loans to agencies as substitutes for contributions; beneficiaries calculate implied grant element.
- Compiler approaches:
  - Where loans are clear substitutes for regular contributions, compilers often treat grant/transfer element as expense at disbursement (substance over form).
  - If contributions are recorded as paid-in capital/equity and not expensed, concessional loans to such beneficiaries should be partitioned at inception between loan and equity element.
- Options if Option C (Issue 1) is rejected:
  - Option A: Manuals should not foresee a specific rule for loans offered as substitutes for contributions.
  - Option B: Manuals should specifically require the grant/transfer element of such substitutes to be explicitly recorded in core accounts at inception (substance over form).
- GN recommendation for Issue 2: transfer element of concessional loans granted as substitutes for regular transfers/grants should be recorded in core accounts consistent with regular contributions; recording low/zero-interest loans in place of outright grants at face value should not be permitted.

### Annex III — Defining and measuring concessionality: options and GN proposals
- Measurement choices for discount reference for new loans (Issue a):
  - Option A: debtor’s typical financing cost.
  - Option B: a market-rate.
  - Option C: observed financing cost of creditor.
  - Option D: commonly agreed CIRR.
- GN assessment and proposal for new loans and MDBs:
  - Proposes referring to both Option C (creditor financing cost) and Option D (CIRR) as viable:
    - Rationale: both conceptually sound, generally low, and limit scope to undisputed subsidized funding.
    - For international agencies (e.g., World Bank, IMF), measuring against their financing cost (Option C) may be appropriate as they typically fund at very low rates.
    - For contributions to MDBs, Option A (debtor funding cost) may be more relevant because MDBs calculate grant element using their own funding cost.
- Debt restructuring (Issue b) options:
  - Option A: same rule as new loans.
  - Option B: use CIRR as in BPM6.
  - Option C: use original interest rate/present value.
- GN proposal for restructuring: follow Option C for Issue b — use the original interest rate/present value of the loan to assess and measure benefit in restructuring.
- Materiality thresholds (Issue c) options:
  - Option A: 25 percent threshold (OECD).
  - Option B: 5 or 10 percent threshold.
  - Option C: no threshold, flexible implementation.
- GN recommendation on thresholds:
  - Rejects arbitrary thresholds (rejects Option A). If creditor borrowing rate is used (Option C for Issue a), concessionality should be established by materially lending below creditor’s cost without a threshold (Issue c, Option C).
  - If compilers adopt a market-rate reference (Issue a, Option B), a 5 or 10 percent threshold could be useful (Issue c, Option B).

### Annex IV — IPSAS references and implications
- IPSAS defines concessionary loans as loans granted/received at below market terms with intention at outset to provide resources below market terms.
- IPSAS prescribes recording the fair (discounted) value at initial recognition for both debtor and creditor:
  - Debtor recognizes revenue (or liability if present obligation exists) equal to non-exchange element.
  - Creditor recognizes an expense at initial recognition for the non-exchange element.
  - Subsequently: debtor recognizes interest expense and creditor recognizes interest revenue higher than contractual facial interest.
- IPSAS illustrative example:
  - CU 5 million 5-year 5 percent loan; market interest 10 percent; non-exchange revenue recognized by borrower: CU 784,550; loan recorded at CU 4,215,450 instead of CU 5 million (IPSAS 23.IG54).
- IPSAS 41.AG118–AG126: distinguish concessional loans (ex-ante) from waivers of debt (ex-post); difference between fair value and transaction price treated as expense at initial recognition (IPSAS 41.AG125(b)).

### Annex V — Commercial low-interest loans (producer incentives and valuation)
- Producer incentives (e.g., zero-interest manufacturer loans) should be recorded at present value to avoid distortion of production output and FISIM.
- 2008 SNA paragraph 3.144 prescribes long-term trade credit be recorded at a discount; practice aligns with IFRS/IPSAS.
- Numeric example (car sale via 5-year in fine loan):
  - Car sold at 10.000 U, present value of loan 7.500 U, production costs 7.000 U, manufacturer/group borrows at 5 percent.
  - Correct recording treats P.11 as present value: 7.500 U (approximately).
  - This yields B.2.n = 500 U at time of sale/production.
  - Incorrect face-value recording would show sale (P.11) of 10.000 U and profit B.2n = B.101 = 3.000 U, frontloading profits and distorting GDP deflator.
- GN conclusion: narrow SNA recording at face value distorts B.1, B.2n, B.10.1, and B.9 and inflates the GDP deflator when low-interest loans are granted.

### Annex VI — Recording transfer element as capital or current transfer
- Three recording options for grant element of concessional loans (Annex VI):
  - Option A: record as current transfers.
  - Option B: record as capital transfers.
- Observations to guide choice:
  - Gift element from government to an international organization could be recorded as capital transfer (paralleling transfers to MDBs).
  - Capital transfers often large/infrequent; current transfers normally smaller/regular. Recurrent purposes could justify current transfer classification.
  - If concessional loan supports acquisition of assets by recipient, record as capital transfer.
  - Concessional lending from government to non-financial corporations aimed at covering production costs may be recorded as subsidies on production.
  - In commercial transactions the one-off element is most straightforwardly recorded as reduction to sales (P.11).
- Recommendation: case-by-case analysis; GN proposes addressing classification after progress on Issues 1 and 2.

### Annex VII — Treatment in debt reorganization context
- Key question: apply same rules for new concessional loans to loans becoming concessional by refinancing, restructuring, or rescheduling.
- Considerations:
  - BPM6 A2.67–A2.70 do not differentiate between concessional terms at inception and those arising from restructuring.
  - In restructurings creditor intent to convey benefit is usually clear; reduction in promised cash flows is a transfer at time of reduction regardless of form.
  - Treating restructurings differently could create incentives for fiscal illusion.
  - Limiting exemption to government-to-government loans could reduce evasion risk.
- GN recommendation: Option A — apply same treatment as for new concessional lending, with alternatives for vote (Sub-options B.b and C.c in Issue 1).

### Practical implications and compilation challenges
- Option C (partition at inception) is conceptually preferred but requires greater statistical infrastructure and compilation resources; IPSAS-compliant statements could automate implementation.
- Measurement of creditor funding cost:
  - Marginal funding cost for same maturity/time is theoretically preferable.
  - Average funding cost is plausible and reduces scope of concessionality.
  - MDBs pose practical difficulties because of grants and concessional contributions in their funding mix; whether to include grants in MDB funding cost is open.

*Guidance Note (GN F.15) — IMF Statistics Department.*

### SECTION I: THE ISSUES

### SECTION I: THE ISSUES

### BACKGROUND
- The Balance of Payments and International Investment Position Manual, sixth edition (BPM6) and the System of National Accounts 2008 (2008 SNA) identify debt concessionality as a topic for research work (BPM6, paragraph 1.43 (h); and 2008 SNA, paragraph A4.44).
- Concessional loans are described in BPM6 and 2008 SNA as lending intentionally provided at a contractual interest rate below market interest rates, for similar grace and repayment periods, with the purpose to convey a benefit, occurring in a non-commercial context (BPM6, paragraphs 3.79 and 12.51; 2008 SNA, paragraphs 3.131, 3.134, 22.123, and 22.124; and GFSM 2014, paragraphs 3.123 and A3.39-41).
- Concessional loans might also be designed with other characteristics aimed at conveying a benefit to the debtor, such as more favorable grace and maturity periods (2008 SNA paragraph 22.123, BPM6 A2.68, EDS Guide paragraph 6.22).
- Concessional lending is frequently observed in government accounts and in transactions between governments and/or international organizations. Concessional lending can be provided at inception or arise later during debt restructurings. Low interest loans are also observed at the national level (e.g., student loans or housing loans) and in the private sector, but private-sector low interest arrangements do not qualify as concessional loans under this GN if the difference between fair value and redemption value is not intended as a transfer.
- This Guidance Note (GN) is restricted to low interest loans provided in a non-commercial context, including entities acting on behalf of others, with an intention to convey a benefit. The GN also addresses the treatment of the grant element of concessional loans provided as clear substitutes of regular contributions to agencies and the appropriate discount rate for measuring the transfer component (Annexes II and III).
- A corollary of the recommendations is that lenders extending “cheap” loans, such as development or international agencies (e.g., the International Monetary Fund), are de facto not extending concessional loans in the meaning of this GN, as they have themselves very low (average) funding costs.
- The GN relates to GN F.9 “Valuation of Loans (Fair Value)”, but GN F.9 focuses on re-estimates in loan value, whereas the present GN deals with valuation at inception.

### ISSUES FOR DISCUSSION — Issue 1: Statistical Treatment of Concessional Lending
- Current macroeconomic statistics manuals recognize that concessional loans contain a transfer element but generally do not prescribe recording any expense (creditor perspective) or revenue (debtor perspective) transaction in the core accounts to capture that transfer; instead they generally prescribe reporting the transfer element as a memorandum item in supplementary tables.
- The implied transfer/grant element currently affects net lending/net borrowing over time indirectly through differences between the loan rate and the lender’s own funding rates (or forgone property income), but this recording does not properly account for the fundamental notion of time value of money.
- Manuals (except the EDS Guide) prescribe reporting concessional loans in balance sheets at inception at their face/nominal value, not at discounted/fair value (references: 2008 SNA, paragraphs 7.54 and 22.123-4; ESA 2010, paragraph 20.241–2; BPM6, paragraphs 12.51 and 13.33; GFSM 2014, paragraphs 6.17, 7.246 and A.340).
- There is a mismatch between (a) the clear manual references to a gift/transfer element and (b) the absence of an explicit/uniform recommendation to record and measure it in core accounts rather than only as supplementary information.
- A related question is whether rules for new concessional loans should also apply to loans that become concessional through refinancing, restructuring, or rescheduling. The GN recommends applying the same rules to debt restructuring (Annex VII).

Options considered for recording concessional loans:
- Option A: No change. Continue to record concessional loans at face/nominal value at inception with no imputation and continue to record the transfer element as a memorandum item/supplementary information.
  - Sub-option A1: No change in core accounts but require more detailed memorandum/supplementary information on the transfer element (e.g., the fair value of the loan and entailed accrued interest).
- Option B: Record concessional loans at face/nominal value at inception, but recognize the transfer element in the core accounts spread over time by increasing the stream of interest earned (D.41) on the loan using a suitable non-concessional rate together with a matching transfer expense (deficit neutral in every accounting period).
- Option C: Partition concessional loans at inception between a “genuine” loan element (F.4) and an explicit “transfer element,” followed later by imputed interest receivable (D.41) of the same cumulated size over the lifetime of the loan that capitalizes on the new nominal value/principal so as to reach the face value before maturity (deficit neutral across the life of the loan).

Numerical example (summary as presented in the GN):
- Creditor grants on January 1 a bullet-loan (5 years, redeemed on December 31) to a debtor:
  - Contractual interest rate: zero
  - Loan amount (face value): 100 Units
  - Discount rate applied (creditor’s average funding rate): 5 percent
- Net present value at inception of the payment stream {0, 0, 0, 0, 100} at a 5 percent discount rate: 78.4 U.
- Transfer recorded at inception: 21.6 (=100-78.4).
- Note: At end Year 5, just before redemption, in all Options the instrument is valued at its face value 100.
- The GN provides detailed statistical entries for creditor and debtor under Options A, B, and C (Annex II).

Discount-rate issue for measuring transfer component:
- Possible approaches: observed funding cost of the creditor, OECD’s Commercial Interest Reference Rates (CIRR), or the funding cost of the borrower.
- The GN recommends using the average cost of the grantor/creditor as the discount rate (conservative approach), because a creditor extending loans below its own current financing terms provides an undisputable indication of a benefit being conveyed.
- The GN notes that CIRR are easily observable, generally fairly low, and aligned with current orientations of macroeconomic statistics manuals.

### ISSUES FOR DISCUSSION — Issue 2: Treatment of Grant Element When Concessional Loans Substitute Contributions to Agencies
- Governments sometimes provide official contributions to agencies in the form of long-term zero-interest loans, with the beneficiary calculating the implied “grant element.”
- Compilers often regard such concessional loans as substitutes for regular contributions; in those cases compilers treat the grant/transfer element as an expense at disbursement to reflect substance over form.
- Consistent recording of transfers regardless of their legal form is desirable to avoid substitution of transfer schemes with low-interest loan schemes.
- Where contributions are not expensed (for example, when recorded as paid-in capital/equity), concessional loans to such beneficiaries should be partitioned at inception between a loan and an equity element.
- Two options are proposed if Option C for Issue 1 is rejected:
  - Option A: Manuals should not foresee a specific rule for cases where a concessional loan is offered as a clear substitute for a contribution/transfer.
  - Option B: Manuals should specifically foresee that the grant/transfer element provided as a substitute to regular contributions should be explicitly recorded in the core accounts at inception, ensuring the substance over form principle.

### RECOMMENDATION
- The GN recommends Option C for Issue 1 because:
  - It is consistent with the economic principle of time value of money.
  - Partitioning at inception follows substance over form and better represents the net assets of creditor and debtor over time (a view shared by International Public Sector Accounting Standards (IPSAS)).
  - Memorandum items in current manuals refer to recording the transfer element at inception (BPM6, paragraph 12.51), suggesting a preference for Option C.
  - Option C does not imply regular re-estimates of discount rate and loan value during the loan lifetime and is consistent with the valuation of normal loans where the contract rate is considered an appropriate discount rate.

*Guidance Note (GN) — SECTION I: THE ISSUES, IMF Statistics Department*

### 20. Further, in case where a creditor sells off (possibly rapidly)  the concessional loan granted,

### Recording transfer element of concessional loans (Guidance Note)

### Key issues and recording options
- Rapid resale of concessional loans at a (steep) discount can cause Options A, A1, and B to fail to record the transfer in the core deficit (net lending/net borrowing) because the resale difference is typically treated as a revaluation.  
- ESA 2010 requires a capital transfer expenditure from the initial creditor to the debtor at time of resale when a government-to-government loan is sold at a loss (ESA 2010, paragraph 20.229–20.231), unless the difference reflects changes in risk free rates. This records the benefit at resale rather than at loan inception.  
- To avoid the counterintuitive outcome of recognizing the benefit only at resale (and thus allowing the deficit impact to escape core accounts), the Guidance Note favors recording the transfer at inception (Option C).  
- BPM6 paragraph A2.69 allows that recording a transfer at inception may be premature because early retirement of concessional loans would require revision of the original capital transfer, an argument supporting Option B. The Guidance Note notes it is highly unlikely that debtors will prepay concessional loans in anticipation unless replaced by even better concessional terms or market rates decline significantly.  
- Concern that Option C could allow timing manipulation (recording a lower loan value at borrower inception to lower reported debt stocks and potentially increase borrowing appetite) is acknowledged, but the Guidance Note stresses the transfer is actually conveyed at inception and delaying the creditor’s deficit impact is the problem that Options A and B permit.

### Comparative merits and shortcomings of Options A, B, and C
- Option A (status quo):
  - Merit: simplicity.
  - Argument: creditor “cost” (proxy for benefit) is captured by lower interest earned relative to funding costs; net assets deteriorate over time without further entries.
  - Nominal valuation of a loan recorded at inception for amounts lent.
- Option B:
  - Merit: corrects misreporting of expenditure by recognizing a transfer from creditor to debtor in core accounts spread over life of instrument; can allocate COFOG.
  - Precedent: 2008 SNA paragraph 7.126 for central bank below-market lending; Option B extends this to government lending or lending on behalf of government.
  - Shortcoming: overestimates subsidy component because it does not use a present value approach; cumulated transfer/subsidy recorded is larger than under Option C and increases without limit as loan maturity increases.
  - If the item subsidized is interest and interest accrues over time, the transfer should be spread accordingly.
- Option C:
  - Merit: records the transfer element at inception and provides the present value of the loan consistent with international accounting standards; avoids allowing the deficit impact to escape core accounts.
  - Shortcoming: practical challenges for countries with low statistical capacity; requires more statistical infrastructure and compilation resources. IPSAS-compliant financial statements or equivalent accounting data could automate implementation.

### Consultation outcomes and recommendations
- Consultation within FITT on Issue 1:
  - Majority support for Option C.
  - Options A/A1 were rejected because macroeconomic statistics should explicitly capture all transfers extended by government in core accounts.
  - Preference for Option C over Option B because Option C recognizes the transfer at the correct period (inception) and provides present value consistent with international accounting standards.
  - Two members favored Option A1 for greater detail; two members preferred either Option B or C.
- Recommendation for Issue 2:
  - The Guidance Note considers that the transfer element of concessional loans granted as substitutes for regular or other transfers/grants needs to be recorded in the core accounts consistently with regular contributions or other transfers/grants and recommends that macroeconomic statistics manuals explicitly clarify this. (This GN considers recording at face value the low/zero-interest loans in place of outright grants should not be permitted.)
  - Consultation within FITT on Issue 2 indicated majority support for Option B, with some members preferring specific guidance for beneficiary institutions (often MDBs) or reserving details for compilation manuals.

### Outcomes of the October 2022 Joint Committee and AEG meeting
- Agreed recommendations:
  - To never record a transfer element for concessional lending in the “central framework” of national accounts and external sector statistics, except for concessional loans provided by employers to employees.
  - To remove the exception made for loans/deposits by central banks, as currently included in the 2008 SNA and GFSM 2014.
  - To classify the transfer element for concessional loans provided by employers to employees as a continuous stream of current transfers in the “central framework” and to classify concessional loans provided in a non-market context (for supplementary tables) as capital transfers at inception.

### Numerical examples and key quantitative findings (Annex II)
- Bullet loan example (5-year bullet loan; contractual zero interest; market interest/discount rate 5 percent):
  - Face value: 100 Units (U).
  - Option C partitions at inception into:
    - Loan element: 78.4 U (net present value of {0,0,0,0,100} discounted at 5 percent).
    - Grant/transfer element: 21.6 U.
  - Under Option B, interest of 5 U (= 5 percent of 100) accrues each year on a constant nominal value of 100 U; therefore cumulated transfer paid/received is higher in Option B than Option C.
  - All three options have the same cumulated deficit impact; stock at (before) redemption equals 100 U across options.
- Constant annuity loan example (5-year loan with constant annuities of 20 U; contractual zero interest; market interest/discount rate 5 percent):
  - Face value: 100 U.
  - Option C partitions at inception into:
    - Loan element: 86.6 U (net present value of {20,20,20,20,20} discounted at 5 percent).
    - Grant/transfer element: 13.4 U.
  - Options A and B presume the stock of the concessional loan reduces by 20 U each year; in Option B interest is imputed over the decreasing stock and neutralized with an imputed transfer.
  - All three options have the same cumulated deficit impact; imputed interest amount differs between Options B and C because Option B accrues interest on initial nominal 100 U, while Option C accrues interest on initial nominal 86.6 U.
- Loan with own financing costs (creditor incurs a 5-year liability at market interest 5 percent with constant annuities {23.1, 23.1, 23.1, 23.1, 23.1}):
  - For the creditor, the interest funding costs cumulate to 15.5 U over the years.
  - All three options have the same cumulated deficit impact for the creditor of 15.5 U.
  - Under Option C for the creditor in the constant annuity case, inception shows a one-off impact of 13.4 U with subsequent smoother deficit impacts that account for both creditor interest paid and imputed interest receivable on the concessional loan with nominal 86.6 U.

### Cross-manual references (excerpt)
- Relevant manual paragraphs noted include:
  - 2008 SNA: 3.134; 7.122–7.126; 22.123–22.124; A4.44.
  - BPM6: 9.33; 12.51; A2.67–A2.70.
  - ESA 2010: 6.58; 20.229–20.231; 20.241–20.242.
  - GFSM 2014: 3.123; 5.108; 6.17; 7.246.
  - EDS Guide: 2.39; 6.22; 6.23; 14.13.

*Source: IMF Guidance Note on debt concessionality (f15-debt-concessionality).*

### Annex III. Defining and Measuring Concessionality

### Annex III. Defining and Measuring Concessionality

### Definition and measurement challenge
- Concessional lending in macroeconomic statistics is characterized by an interest rate “below market interest rates”; however, what constitutes “market interest rates” and the appropriate discount rate to measure the transfer component is imprecise.
- The degree of concessionality can be measured as the difference between loan terms provided to the debtor and:
  - (i) the actual funding terms of the debtor;
  - (ii) the actual funding terms of the creditor; or
  - (iii) a typical market rate.
- Consistent measurement is important to avoid cross-border asymmetries and to distinguish concessional lending from gifts and waivers.

### Reference rates commonly invoked
- The OECD’s CIRR is commonly used as a common discount rate, notably in the Paris Club and BPM6 contexts.
- IPSAS uses a 10 percent threshold to decide derecognition on restructuring (irrespective of concessionality).
- OECD’s conventional grant element threshold: difference between face value and present value (using CIRR) of at least 25 percent defines concessionality.
- CIRR characteristics:
  - Stipulates minimum interest rates applicable to official financing support for export credits.
  - Typically low, reflecting excellent credit risk conditions.
  - A (minimum) margin is to be applied in addition to CIRR to reflect credit risks.

### Options presented for choosing discount rate (Issue a — new loans)
- Option A: the “typical” financing cost of the debtor.
- Option B: a market-rate.
- Option C: the observed financing cost of the creditor.
- Option D: the commonly agreed CIRR.

### Options for debt reorganization discount rate (Issue b)
- Option A: apply the same rule as for new loans.
- Option B: use the CIRR as in BPM6.
- Option C: use the original interest rate/present value of the loan.

### Options for materiality threshold (Issue c)
- Option A: threshold of 25 percent between face value and present value (OECD).
- Option B: lower threshold of 5 or 10 percent.
- Option C: no threshold, with flexibility of implementation.

### Assessment of options for new loans (findings)
- Option A (debtor’s typical financing rate):
  - Measures implicit benefit from debtor’s viewpoint.
  - Imposes varying transfer elements across debtors (depends on credit risk), increases scope of concessional loans, and is burdensome to implement.
  - Circularity problem: debtor financing costs may be influenced by existence/possibility of concessional lending (e.g., borrowers shut off from credit markets).
- Option B (market rate):
  - Captures average credit rating and average borrowing costs; avoids borrower-specific conditions.
  - Difficulties: many possible market reference rates; measures benefit relative to market conditions debtor would face rather than benefit actually conveyed by creditor.
  - Definitional remedy: specifying a single, frequently published reference market rate could mitigate ambiguity.
- Option C (creditor’s financing cost):
  - Conceptually and practically attractive; easily assessable (especially for government creditors) and measures benefit from creditor’s viewpoint.
  - Credible indicator: creditor lending below its own current financing terms is undisputable evidence of a transferred benefit.
  - Measurement methods: marginal funding costs for same maturity and time are theoretically preferable; average funding cost is also plausible and tends to reduce the scope of concessionality.
  - Practical difficulty for MDBs: MDBs finance themselves largely through grants or concessional contributions — question whether MDB funding cost should include grants received.
- Option D (CIRR):
  - Aligned with current macroeconomic statistics orientations.
  - Easily observable by national statistical institutes and generally low, reflecting low credit risks.

### GN proposal for new loans and MDBs
- The Guidance Note proposes that macroeconomic statistics manuals refer to both Option C (creditor financing cost) and Option D (CIRR) as viable for new concessional lending.
  - Rationale: both are conceptually sound, imply generally low discount rates, and limit scope to undisputed subsidized funding.
  - For loans provided by international agencies (e.g., World Bank, IMF), measuring concessionality against their financing cost (Option C) may be more appropriate because they typically fund themselves at very low rates.
  - For contributions to MDBs or similar situations, Option A (debtor funding cost) may be more relevant as each MDB calculates grant element using its own funding cost.

### Debt restructuring (findings and proposal)
- 2008 SNA refers to CIRR for debt restructuring, which has merit but may understate transfer element if debtors’ risk profiles are less favorable than average.
- IPSAS 41 paragraph 71 recommends using the original (market) contract rate for measuring concessionality implied by renegotiation when the loan is not derecognized (i.e., when restructuring implies change in present value of less than 10 percent); when derecognized, the market rate at time of restructuring applies.
- Distinction: restructuring often has a well-defined reference—the original contract rate—making grant component easier to establish than for new loans. Using a market rate could convert holding gains into transactions, which is generally not recommended.
- The Guidance Note proposes following Option C for Issue b: use the original interest rate/present value of the loan to assess and measure benefit in debt restructuring.

### Materiality threshold (recommendation)
- The Guidance Note rejects using arbitrary thresholds (rejects Option A for Issue c).
  - Thresholds create incentives to structure transactions to avoid accounting impacts while preserving economic effects.
  - The 25 percent OECD threshold is considered too large and less necessary if creditor borrowing rate is used.
- If Issue a uses Option C (creditor borrowing rate), concessionality should be established by materially lending below the creditor’s cost without the need for a threshold (Issue c, Option C).
- If compilers adopt a market-rate reference (Issue a, Option B), then using a 5 or 10 percent threshold could be useful (Issue c, Option B).

### Practical measurement issues and special cases
- Transfer element may be explicit in commercial discounts or loans substituting donor contributions (e.g., MDBs).
- Reference rate uncertainty in many cases means the relevant rate could be debtor funding cost, creditor funding cost, a market rate, or another common rate.
- Precisely measuring creditor funding cost:
  - Marginal funding cost for same maturity and time is theoretically preferable.
  - Average funding cost is plausible and reduces scope of concessionality.
- MDBs present difficulties because they often fund themselves with grants or concessional loans; whether to include grants when calculating MDB funding cost is an open issue.

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### Annex IV. IPSAS references and implications for recording

### IPSAS definition and recording approach (key points)
- IPSAS: concessionary loans are loans granted/received at below market terms, with an intention at outset to provide/receive resources at below market terms (distinct from “waiver of debt”).
- IPSAS prescribes recording the fair (discounted) value in the statement of financial position for both debtor and creditor.
  - At inception: recognize revenue (or liability) for the debtor and an expense for the creditor corresponding to the non-exchange element.
  - Subsequently: recognize interest expense for the debtor and interest revenue for the creditor that is higher than the contractual facial interest.
- Where conditionality exists, IPSAS prescribes spreading revenue for the debtor (IPSAS 23.105B and IPSAS 23.IG54) while the creditor recognizes a one-off expense.

### IPSAS mechanics and example
- IPSAS 23.105A–105B: the non-exchange part equals the difference between transaction price (loan proceeds) and fair value of the loan at initial recognition; recorded as revenue for receiver except when a present obligation exists (then recorded as liability).
- IPSAS illustrative example (IPSAS 23.IG54):
  - A currency unit (CU) 5 million 5-year 5 percent rate loan, with an additional CU 1 million of straightforward grant revenue in the example.
  - Non-exchange revenue recognized by borrower for the difference between contract interest rate of 5 percent and comparable market interest rate of 10 percent equals CU 784,550.
  - Consequently, a loan of CU 4,215,450 is recorded in the balance sheet at inception, instead of CU 5 million.
- IPSAS 41.AG118–AG126:
  - Distinguish concessional loans (ex-ante) from waiver of debt (ex-post).
  - Clarify initial intention to provide resources at below market terms.
  - IPSAS 41.AG125(b): “Any difference between the fair value of the loan and the transaction price (...) is treated as an expense in surplus or deficit at initial recognition.”

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### Annex V. Commercial loans at low-interest rate (producer incentives and valuation)

### Treatment and rationale
- Producers (e.g., car manufacturers) sometimes offer low-interest or zero-interest loans as commercial incentives, often via in-house banks.
- Question arises whether such arrangements constitute trade credit (AF.81) or a genuine loan (AF.4).
- To appropriately measure producer output, the lending instrument should be valued at its present value (discounted); recording face value at inception is not admissible because it distorts timing of output and operating surplus and the statistical classification of activities (NACE), and misstates FISIM.

### Existing prescriptions and practice
- 2008 SNA paragraph 3.144 prescribes long-term trade credit be recorded at a discount.
- Macroeconomic statistics de facto record such concessional commercial lending at discount/present value consistent with IFRS/IPSAS treatments; either manufacturer or its bank records an asset equal to present value of the lending contract.

### Numerical example (producer sale with in-fine loan)
- Assumptions (as in source):
  - Car sold at 10.000 U, through a 5-year in fine loan, with a present value of 7.500 U.
  - Production costs are 7.000 U.
  - Manufacturer/group borrows at 5 percent.
  - Compounding of interest is neglected in example.
- Incorrect face-value recording would produce:
  - Sale (P.11) of 10.000 U at time of sale, and a profit of B.2n = B.101 = 3.000 U.
- Yearly flows if bank is part of group (disregarding FISIM):
  - Each subsequent year B.2n = 0 and B.101 = -500 U (reflecting funding costs and zero property income).
  - Over five years B.2n = -2500 U (if applying FISIM each year B.2n = B10.1 = -500 U), with overall B.2n = 3000 - 2500 = +500 U.
- Conclusion: if the bank is a monetary financial institution, negative FISIM should be recorded; recording the loan at face value would create anomalies that distort GDP timing and composition.

*Source: IMF Guidance Note — Annex III. Defining and Measuring Concessionality; Annex IV. International Public Sector Accounting Standards References; Annex V. Commercial Loans at Low-Interest Rate.*

### 9.      The correct recording is to consider that the P.11 is the present value of the cash to be collected

### f15-debt-concessionality - 9.      The correct recording is to consider that the P.11 is the present value of the cash to be collected

### Recording of commercial loans at low-interest rates
- The correct recording treats P.11 as the present value of the cash to be collected: 7.500 U (approximately).
- This yields B.2.n = 500 U at time of sale/production.
- In subsequent years B.1 = B.2n = 0 and B.101 = 0 because the bank earns interest of 500 U, which generates no FISIM if the interbank rate is 5 percent.
- Narrow SNA recording at face (nominal) value would distort:
  - B.1, B.2n, B.10.1, and B.9 of the carmaker/group, frontloading future profits.
  - The NACE classification of value added, producing too much car-making activities and too little/negative FISIM.
- Example ledger lines as shown (preserve formatting and numbers as in source):
  - P. 1 110,000-50007,5007,500007,500
  - D.17,000007,0007,000007,000
  - D.41rec050002,500050002,500
  - D.41pay050002,500050002,500
  - B.23,000-500050050000500
  - B.93,000-500050050000500
  - B.9f3,000-500050050000500
  - F.25000050050000500
  - F.410,0000-10,00007,500500-10,0000
  - F.3L7,500500-10,00007,500500-10,0000

### Macroeconomic implication: GDP deflator distortion
- If all loans are recorded at inception at face value (narrow SNA interpretation), value added is distorted over time while the volume of activity is not.
- The difference enters the GDP deflator: the GDP deflator (erroneously) increases when low interest rate loans are granted.
- Intuition: low interest rate loans act as a discount on cars that should reduce household consumption and GDP deflators; failing to recognize this inflates both deflators.

### Annex VI — Recording the transfer/grant element of concessional loans
- Three recording options for the grant element (transfer/grant) are considered:
  - Option A: Current transfers.
  - Option B: Capital transfers.
- Observations and guidance:
  - The gift element of a concessional loan from a government to an international organization could be recorded as another capital transfer, paralleling outright transfers from governments to MDBs (2008 SNA, paragraph 8.38).
  - Capital transfers in cash can require the second party (the MDB) to use funds for acquisition of assets (loans to beneficiaries) (ESA 2010, paragraph 4.146).
  - Capital transfers distribute wealth; the grant element of a concessional loan can be seen as distribution of wealth from developed to developing countries, intermediated by an MDB.
  - The grant element is sometimes seen as a current transfer (current international cooperation) given recurrent nature and purposes (2008 SNA, paragraph 22.99 (c); BPM6, paragraph 12.51).
  - Typical characteristics: capital transfers are usually large and infrequent; current transfers are normally smaller and regular (2008 SNA, paragraph 8.38).
  - The choice between capital and current transfer recording may depend on whether the grant element is recorded at inception or spread over the loan lifetime.
  - If the concessional loan aims to support acquisition of assets by the recipient, record the transaction as a capital transfer.
  - Concessional lending from government to non-financial corporations may warrant recording the grant element as subsidies on production if aimed at covering production costs.
  - In commercial transactions, the one-off element is most straightforwardly recorded as reduction to sales (P.11).
- Recommendation: case-by-case analysis of the operation is necessary to choose the appropriate non‑financial transaction; the GN proposes to address this issue later after progress on Issues 1 and 2.

### Annex VII — Statistical treatment in the context of debt reorganization
- Issue: whether rules for new concessional loans should extend to loans that become concessional due to refinancing, restructuring, or rescheduling.
- Options:
  - Option A: Apply same treatment as for new concessional lending.
  - Option B: Apply a different treatment (e.g., spreading the transfer).
- Key considerations:
  - BPM6 paragraphs A2.67 to A2.70 do not differentiate between concessional terms at inception and those arising from restructuring.
  - Difference in intent: in restructurings the creditor undisputedly intends to convey a benefit; for new concessional loans the creditor’s intent may be less clear.
  - A reduction in promised cash flows is in substance a transfer/grant at the time of reduction regardless of timing or whether reduction is in interest or principal.
  - Treating restructurings differently could create incentives for fiscal illusion (e.g., governments providing market-rate loans and later restructuring to evade deficit impact).
  - A limiting approach: restrict any exemption for restructurings to government-to-government loans to avoid evasion via government-public corporation operations.
- GN recommendation: Option A is recommended, but an alternative for the vote is offered via Sub-options B.b and C.c in Issue 1.

### Annex VIII — Impact of the sale of zero interest rate loans (numerical example and analysis)
- Purpose: illustrate accounting impact on grantor (government) accounts due to resale of zero interest loans.
- Setup and numerical assumptions:
  - 5-year bullet loan of 100 with a discount rate of 5 percent (also the funding rate of the creditor).
  - Creditor funds loans by issuing a 5-year zero coupon bond issued at 100 with face value 127.63.
  - Consider two scenarios: creditor holds asset to maturity (“lend and hold”) or sells claim immediately after issuance (“lend and sell”).
- Key numeric results and interpretations:
  - If held to maturity, cumulated B.9 over time is the same for Options A, B, C: -27.63 (total interest costs of creditor’s financing).
  - Option C differs in time profile (front loading): net assets start at -21.65 under Option C (difference between face value of zero-interest claim and its nominal value/NPV at inception), creating a non-zero net lending/net borrowing during life of loan.
  - In a “lend and sell” scenario where the loan is sold immediately after issuance for its market value/NPV at inception of 78.35:
    - Creditor uses 78.35 to redeem its own financing; creditor retains a loan net liability of 21.65 after the sale (that will accrue further interest).
    - Under Option A, cumulated B.9 differs between “lend and hold” and “lend and sell”: -5.98 instead of -27.63. The -5.98 corresponds to the sole carrying cost of the initial gift of 21.65 (26.63 = 21.65 + 5.98). With Option A, if resold immediately after issuance the whole gift element of 21.65 evades the deficit.
    - If sale occurred mid-maturity, only part (around half) of the gift would evade the deficit.
    - Decomposition: change in net worth over 5 years of 27.63 is decomposed into a holding loss of 21.65 and a net negative saving and net capital transfer component of 5.98.
  - Under Option C, “lend and hold” and “lend and sell” lead to identical cumulated B.9 and identical B.9 each year; D.41R is effectively netted from D.41P in the “lend and sell” scenario—no claim remains and only carrying cost of the gift remains. Option C always reflects in the deficit the effective change/decrease in net worth regardless of resale timing.
  - Option B yields same result as Option A because the “subsidy” and matching “increased interest revenue” approach are matching imputations; upon sale the “subsidy” expenditure cannot be recorded, leading to the same discrepancy as Option A.
- Analysis when resale price reflects further value changes:
  - Resale price generally reflects (i) initial discount amortized to date using discount rate at inception (first component) and (ii) any difference in discount rate (second component).
  - Under Option C, the first component is already accrued in net lending/net borrowing; the second component is appropriate to record in revaluation, possibly decomposing it into genuine market rate change (part 1) and discrepancies due to the initial discount rate not being a true market rate (part 2).
  - Under Options A and B, because the initial discount is not recorded in the deficit, it may be appropriate to record a capital transfer at time of sale (as ESA 2010 prescribes in some circumstances, excluding the second component part 1).
- Representative numeric magnitudes preserved from the example:
  - 5-year bullet loan of 100, discount rate 5 percent.
  - Zero coupon bond face value 127.63 issued at 100.
  - Sale/NPV at inception of the concessional loan: 78.35.
  - Gift element (difference after sale): 21.65.
  - Cumulated B.9 (total interest costs): -27.63 (lend and hold).
  - Cumulated B.9 in lend-and-sell under Option A: -5.98.
- Conclusion drawn by the GN:
  - Option A and B can distort net lending/net borrowing in case of secondary sale of zero-interest instruments; Option C does not.
  - ESA 2010 attempts to correct distortions by recommending recording a capital transfer at time of sale in some circumstances.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/f15-debt-concessionality.pdf_