## f9-valuation-of-loans-fair-value

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---

### Background and current statistical standards
- Loans are valued at the amount that the debtor must pay to extinguish the claim, that is nominal value (2008 SNA; BPM6; MFSMCG).
- Nominal value reflects the outstanding principal amount including any accrued interest and "should also include any interest that has been earned but not been paid" (2008 SNA, paragraph 13.62).
- BPM6 defines nominal value as "the outstanding amount the debtor owes to the creditor, which is composed of the outstanding principal amount including any accrued interest" (paragraph 3.88.b) and describes it as the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments.
- Absence of regular market observations does not prevent valuing assets "as if" they were being acquired on the date to which the balance sheet relates; valuation might be achieved by reference to the present value of future cash flows (2008 SNA, paragraph 3.16; BPM6, paragraph 3.84).
- Values of loans to be recorded in balance sheets of both creditors and debtors are the amounts of principal outstanding at the reporting date (2008 SNA; BPM6).
- Nominal value is commonly interpreted as a debtor-view measure; alternative definitions (e.g., fair value or loss-adjusted value) could be interpreted as creditor-view measures.
- MFSMCG records loan loss provisions in core accounts as a liability (other accounts payable) but retains the same measurement of loans on the asset side as in 2008 SNA and BPM6, regardless of provisioning (MFSMCG, paragraph 5.126).
- Market value for loans is recognized in the valuation of flows (transactions) when a loan is sold at below (above) nominal value; before and after the transaction, stocks remain valued at nominal value. Sellers and buyers record opposite other price changes to reconcile the difference (BPM6, paragraph 9.33; MFSMCG, paragraph 5.128).
- Memorandum items: 2008 SNA introduces fair value as the closest approximation to market-equivalent value to be used for memorandum items; NPLs are disclosed as supplementary information but recorded at nominal value in core accounts (2008 SNA; BPM6; MFSMCG).

### Concerns motivating reconsideration of valuation practice
- The review leading to 2008 SNA was completed before the 2008 great financial crisis; subsequent issues and policy responses were not fully taken into account.
- Financial rescue practices (e.g., government acquisition of existing loans, creation of specific units to assume NPLs) mean that nominal valuation can "blur the economic representation of government exposure"; market valuation would allow imbalances to emerge through net worth impacts.
- Preference to prevent underestimation of debt (nominal valuation unaffected by credit risk) has been increasingly challenged by the need to avoid optimistic creditor-side views and to support financial stability analysis.
- Memorandum items are useful but cannot fully substitute for consistent entries in core accounts because they do not feed into main indicators such as net lending/net borrowing and change in net worth (SNA and GFSM 2014).
- Unnecessary deviations from business accounting data (IFRS and IPSAS) can arise where deviations are not justified by statistical principles.
- Arguments in favor of nominal valuation include maintaining consistency with debtor accounting (debtor records full amount until liquidation or agreement) and achieving symmetry between debtor and creditor records absent an active market.

### Options considered for loan valuation
- Two main options, each with two variants:
  - Option 1 — Maintaining the Current Nominal Valuation
    - Option 1a — Do not change the current valuation of loans; retain nominal valuation in updated SNA and BPM.
    - Option 1b — Retain nominal valuation but improve and clarify updated SNA and BPM guidance, allowing for value reset beyond bankruptcy and liquidation when public evidence of loan deterioration exists.
  - Option 2 — Shifting to Fair Valuation
    - Option 2a — Shift to a simplified estimate for fair value based on nominal value less expected loan losses (a "written down" value).
    - Option 2b — Shift to full fair valuation at any time for all loans in the core accounts.

### Assessment — Option 1a (Do Not Change Current Valuation)
- Features:
  - Fair value remains limited to memorandum items and NPLs.
  - Some minor SNA updates may be required for consistency with other guidance (e.g., GN F.8; ESA 2010).
- Main advantages:
  - Prevents artificial improvements in the debtor's net worth when creditworthiness decreases.
  - Aligns with opportunity-cost reasoning for non-traded instruments: debtor and creditor are "locked in" while the loan remains not tradable.
- Main drawback:
  - May overstate asset-side valuations of the financial sector and distort financial positions; memorandum items are under-emphasized by users absent stricter guidance.

### Assessment — Option 1b (Improving the Existing Framework)
- Current allowance:
  - Value reset is allowed in absence of specific transactions in case of bankruptcy, liquidation, or other factors (2008 SNA, paragraph 12.40); "other factors" are not described in 2008 SNA but BPM6 and GFSM 2014 cite court orders (GFSM 2014, paragraph 10.57; BPM6, paragraph 9.9).
- Proposed improvements:
  - Extend the possibility of resetting loan values beyond bankruptcy, liquidation, and court decisions to cases of reassessment by a formal, publicly known process (e.g., bank recovery operations) where shareholders are imposed to absorb loss; include evidence of deterioration from specific transactions at deep discount or extraordinary events.
  - Extend and clarify the section on other changes in assets—Debt Operations in 2008 SNA (paragraphs 12.38–12.42), and corresponding parts in other manuals, to list other cases leading to permanent reduction in loan value and to separate them from cases managed via opposite revaluations.
- Implications:
  - Loans remain recorded at nominal value; standard provisioning does not affect balance sheets.
  - No continuous revaluations based on expected losses or market condition changes; however, creditor-view reductions would be permitted in a wider set of cases.
- Main advantage:
  - Improves measurement for fiscal and financial stability analysis while minimizing burdens of change.
- Main drawback:
  - Does not fully align with the general market valuation principle (2008 SNA, paragraph 2.60); memorandum items on fair value should be retained.

### Assessment — Option 2a and Option 2b (Shifting to Fair Valuation)
- Fair value definition and methods (2008 SNA, paragraph 13.67):
  - "the amount that approximates the value that would arise from a market transaction between two parties."
  - Can be established using transactions in comparable instruments, discounted present value of cash flows, or sometimes available from the balance sheets of the creditor.
- Option 2a:
  - Allows a "second-best approach" where, in absence of fair value data, memorandum items use nominal value less expected loan losses.
  - The simplified (written down) value in Option 2a "takes continuously into account changes in value arising from impairment," implying loans should be revalued even if not traded.
- Option 2b:
  - Proposes full fair valuation at any time for all loans in the core accounts.
  - Fair valuation with discounting uses the current or expected discount rate; differs from Option 2a by using the initial/at-inception discount rate instead of the current rate.
- Considerations for both:
  - MFSMCG provides extensive guidance on fair value methods and differences with historic cost, amortized, face, and book value (paragraphs 5.44–5.49).
  - Multiple allowed alternatives for fair value are an advantage for memorandum-item compilation but problematic for core accounts because horizontal consistency between counterparties is required when fair valuation is introduced in core accounts.
  - Fair valuation should account for changes due to both market rates and impairment; discount rate may differ from contractual/inception rate (see MFSMCG, Box 5.1).
  - Changes in discount rates and impairment measures should be recorded in the revaluation account and reflected in the IIP.

### Data, memorandum-item implications, and operational issues
- If Option 2b is adopted with full shift to fair valuation in core accounts, new memorandum items should present nominal values of loans (analogous to debt securities).
- Core problem: achieving cross-country consistency that affects the quadruple entry system when creditor records do not match debtor records.
- Use of nominal values as memorandum items can help partially solve inconsistencies between positions reported by creditors and debtors.
- Data availability notes:
  - Aggregate loan loss provisions: generally available.
  - Breakdown of provisions by counterpart: not always available but needed for most datasets; this breakdown is part of the memorandum items recommended by the MFSMCG (paragraph 5.142).
- Practical advantages of fair valuation:
  - Connection to real business practice, facilitating use of available information, and reducing reporting burden.
- Downsides of full fair valuation:
  - Potential for cross-country inconsistencies.
  - Significant statistical burden of changing current practice.
- Specific guidance required:
  - Reconciliation between asset and liability sides when different methods are adopted.
  - Guidance for resident–nonresident transactions where information may be available on only one side.
  - Creditor viewpoint strategies where counterparties are resident and sources are available.

### Symmetry, related instruments, and scope
- Symmetry is a fundamental principle: accounts require the same value in debtor and creditor records (BPM6, paragraphs 3.122–3.125).
- Nominal valuation supports symmetry by being independent of potentially different estimates by the two parties.
- The 2008 SNA sometimes imposes one sector’s view on another to maintain balance (example: write-offs—2008 SNA paragraph 12.40).
- Addressing symmetry via the creditor viewpoint is a commonality across Option 1b, Option 2a, and Option 2b.
- Clarification would be beneficial to ensure consistent recording under the creditor viewpoint; extension of write-offs beyond bankruptcy/liquidation/court orders and guidance on write-off reversal (see MFSMCG, paragraph 5.231) would support reconciliation without asymmetry.
- The fair valuation discussion would extend beyond loans to deposits and accounts receivable/payable; same valuation criteria should apply across financial instruments; any option other than status quo (Option 1a) would imply corresponding changes for other instruments.

### Examples, operational illustrations, and valuation adjustments
- Worked example under MNAFP/2008 SNA framework:
  - Opening nominal value of loans: CU 1,300.0.
  - Market (fair) value: CU 800.0.
  - Option 1 — sold at market price (CU 800.0): realized holding loss for seller and realized holding gain for buyer each equal CU 500.0; no net impact on net worth of institutional units.
  - Option 2 — sold above market price at CU 1,000.0: capital transfer from buyer (general government) to seller (deposit-taking corporation) equals CU 200.0 (difference between CU 1,000.0 and CU 800.0); sale results in relocation of assets/liabilities and impacts net worth through the capital transfer.
- Expected loan loss definition and measurement (MFSMCG):
  - Expected loan loss = nominal amount − recoverable amount (present value of expected cash flows or collateral liquidation net of costs).
  - Discount rate rules for recoverable amount measurement:
    - Use original yield to maturity for calculating present value when measuring recoverable amount of impaired assets.
    - If loan has variable interest rate, use current yield to maturity (MFSMCG).
- Treatment of provisions and write-offs in monetary statistics:
  - Provisions for loan losses are recorded under Other accounts payable [MS]—other and treated as precursor to write-off; OCVA entries record provisioning flows with contra-entries in Equity liability [MS] (Current year result) (MFSMCG).
  - Loan write-offs are recorded as OCVA reductions in the outstanding amount of the financial asset with contra-entry reducing Provisions for loan losses; if insufficient provision exists, the contra-entry reduces Equity liability [MS] (MFSMCG).
  - Reversal of provisions and recoveries are recorded as OCVA entries reversing earlier provisioning with contra-entries to Equity liability [MS] (MFSMCG).

### Outcomes, preferences, committee decisions, and recommendations
- The Guidance Note (GN) rejects Option 2a and Option 2b and favors Option 1b. One co-author supports Option 2a (nominal value less expected losses or written down value).
- Practical difficulties noted with full market valuation, including issues with the public sector loan portfolio and challenges linking core accounts to memorandum items.
- Cross-border symmetry is unlikely to be achieved in practice because compilers have limited access to partner-country data, both at individual and aggregate levels.
- Majority view among FITT members: maintain nominal valuation of loans, either unchanged or in an extended version adjusted for extraordinary/publicly known events, provided conditions for a loan reset can be tightly defined and limited in scope.
  - Option 1b: strictly limited to extraordinary and publicly known events.
- Members of the IMF Committee on Balance of Payments Statistics and the Advisory Expert Group on National Accounts overwhelmingly supported valuation of loans at nominal value (Option 1) over valuation at fair value (Option 2).
- Reasons cited for supporting Option 1:
  - Maintains symmetry between debtors and creditors.
  - Fair value seen as a one-sided assessment of loan repayment risk.
  - Preference driven by pragmatic reasons and data availability.
- A large majority supported extending situations in which loan value should be reset (Option 1b), acknowledging the need to account for public announcements that make nominal valuation clearly unrealistic.
- Recommendations in the Guidance Note were approved by the Committee and the AEG in the October 2021 meeting.

### Relevant SNA excerpts and valuation principles cited
- 2008 SNA: Chapter 13 (The Balance Sheets) and Chapter 12 (The other changes in assets accounts), plus paragraph 2.60, are most relevant.
- Paragraph 2.60: "Assets and liabilities are recorded at current values at the time to which the balance sheet relates..." and current values may be approximated by accumulation/revaluation of transactions or by discounted present value of future returns.
- Paragraph 13.16: balance sheet items should be valued as if acquired on the date of the balance sheet; financial claims not traded on organized markets are valued at the amount the debtor must pay to extinguish the claim.
- Paragraph 13.18: observable market prices should be used when available; when not, estimate what prices would be on the valuation date.
- Paragraph 13.19: values may be approximated by accumulation and revaluation of transactions or by discounted value of future economic benefits.
- Paragraph 13.54: financial assets traded on organized markets should be valued at current prices; non-traded financial claims should be valued at the amount the debtor must pay to extinguish the claim; assets and liabilities should be assigned the same value whether appearing as assets or liabilities.
- Nonperforming loan (NPL) operational definition: payments of interest or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue but other good reasons exist to doubt full payment (2008 SNA; BPM6; MNAFP).
- Recommended memorandum items for NPLs:
  - Nominal value of loans so designated, including accrued interest and service charge (2008 SNA; MNAFP).
  - Market-equivalent value (closest approximation: fair value); if unavailable, report nominal value less expected loan losses as the second-best approach (2008 SNA; MNAFP).

*Source: IMF Guidance Note F.9 "Valuation of Loans, Fair Value" — SECTION I: THE ISSUE, and excerpts from the Guidance Note on Valuation of Loans — Fair Value (including references to 2008 SNA, BPM6, BPM6 Compilation Guide, EDS Guide, MFSMCG, MNAFP).*

### SECTION I: THE ISSUE

### f9-valuation-of-loans-fair-value - SECTION I: THE ISSUE

### Background and current statistical standards
- loans are valued at the amount that the debtor must pay to extinguish the claim, that is nominal value (2008 SNA; BP M6; MFSMCG).
- nominal value reflects the outstanding principal amount including any accrued interest and "should also include any interest that has been earned but not been paid" (2008 SNA, paragraph 13.62).
- BPM6 defines nominal value as "the outstanding amount the debtor owes to the creditor, which is composed of the outstanding principal amount including any accrued interest" (paragraph 3.88.b) and describes it as the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments.
- absence of regular market observations does not prevent valuing assets "as if" they were being acquired on the date to which the balance sheet relates; valuation might be achieved by reference to the present value of future cash flows (2008 SNA, paragraph 3.16; BP M6, paragraph 3.84).
- values of loans to be recorded in balance sheets of both creditors and debtors are the amounts of principal outstanding at the reporting date (2008 SNA; BP M6).
- nominal value is commonly interpreted as a debtor-view measure; alternative definitions (e.g., fair value or loss-adjusted value) could be interpreted as creditor-view measures.
- MFSMCG records loan loss provisions in core accounts as a liability (other accounts payable) but retains the same measurement of loans on the asset side as in 2008 SNA and BPM6, regardless of provisioning (MFSMCG, paragraph 5.126).
- market value for loans is recognized in the valuation of flows (transactions) when a loan is sold at below (above) nominal value; before and after the transaction, stocks remain valued at nominal value. Sellers and buyers record opposite other price changes to reconcile the difference (BPM6, paragraph 9.33; MFSMCG, paragraph 5.128).
- memorandum items: 2008 SNA introduces fair value as the closest approximation to market-equivalent value to be used for memorandum items; NPLs are disclosed as supplementary information but recorded at nominal value in core accounts (2008 SNA; BPM6; MFSMCG).

### Concern in the current standards and reasons to consider changes
- the review leading to 2008 SNA was completed before the 2008 great financial crisis; subsequent issues and policy responses were not fully taken into account.
- financial rescue practices (e.g., government acquisition of existing loans, creation of specific units to assume NPLs) mean that nominal valuation can "blur the economic representation of government exposure"; market valuation would allow imbalances to emerge through net worth impacts.
- preference to prevent underestimation of debt (nominal valuation unaffected by credit risk) has been increasingly challenged by the need to avoid optimistic creditor-side views and to support financial stability analysis.
- memorandum items are useful but cannot fully substitute for consistent entries in core accounts because they do not feed into main indicators such as net lending/net borrowing and change in net worth (SNA and GFSM 2014).
- unnecessary deviations from business accounting data (IFRS and IPSAS) can arise where deviations are not justified by statistical principles.
- arguments in favor of nominal valuation include maintaining consistency with debtor accounting (debtor records full amount until liquidation or agreement) and achieving symmetry between debtor and creditor records absent an active market.

### Issues for discussion: options considered
- two main options are considered, each with two variants:
  - Option 1 — Maintaining the Current Nominal Valuation
    - Option 1a — Do not change the current valuation of loans; retain nominal valuation in updated SNA and BPM.
    - Option 1b — Retain nominal valuation but improve and clarify updated SNA and BPM guidance, allowing for value reset beyond bankruptcy and liquidation when public evidence of loan deterioration exists.
  - Option 2 — Shifting to Fair Valuation
    - Option 2a — Shift to a simplified estimate for fair value based on nominal value less expected loan losses.
    - Option 2b — Shift to full fair valuation at any time for all loans in the core accounts.

### Assessment of Option 1a (Do Not Change Current Valuation)
- features:
  - fair value remains limited to memorandum items and NPLs.
  - some minor SNA updates may be required for consistency with other guidance (e.g., GN F.8; ESA 2010).
- main advantages:
  - prevents artificial improvements in the debtor's net worth when creditworthiness decreases.
  - aligns with opportunity-cost reasoning for non-traded instruments: debtor and creditor are "locked in" while the loan remains not tradable.
- main drawback:
  - may overstate asset-side valuations of the financial sector and distort financial positions; memorandum items are under-emphasized by users absent stricter guidance.

### Assessment of Option 1b (Improving the Existing Framework)
- current allowance:
  - value reset is allowed in absence of specific transactions in case of bankruptcy, liquidation, or other factors (2008 SNA, paragraph 12.40); "other factors" are not described in 2008 SNA but BPM6 and GFSM 2014 cite court orders (GFSM 2014, paragraph 10.57; BPM6, paragraph 9.9).
- proposed improvements:
  - extend the possibility of resetting loan values beyond bankruptcy, liquidation, and court decisions to cases of reassessment by a formal, publicly known process (e.g., bank recovery operations) where shareholders are imposed to absorb loss; include evidence of deterioration from specific transactions at deep discount or extraordinary events.
  - extend and clarify the section on other changes in assets—Debt Operations in 2008 SNA (paragraphs 12.38–12.42), and corresponding parts in other manuals, to list other cases leading to permanent reduction in loan value and to separate them from cases managed via opposite revaluations.
- implications:
  - loans remain recorded at nominal value; standard provisioning does not affect balance sheets.
  - no continuous revaluations based on expected losses or market condition changes; however, creditor-view reductions would be permitted in a wider set of cases.
- main advantage:
  - improves measurement for fiscal and financial stability analysis while minimizing burdens of change.
- main drawback:
  - does not fully align with the general market valuation principle (2008 SNA, paragraph 2.60); memorandum items on fair value should be retained.

### Assessment of Options 2a and 2b (Shifting to Fair Valuation)
- fair value definition and methods (2008 SNA, paragraph 13.67):
  - "the amount that approximates the value that would arise from a market transaction between two parties."
  - can be established using transactions in comparable instruments, discounted present value of cash flows, or sometimes available from the balance sheets of the creditor.
- Option 2a:
  - allows a "second-best approach" where, in absence of fair value data, memorandum items use nominal value less expected loan losses.
- Option 2b:
  - proposes full fair valuation at any time for all loans in core accounts.
- considerations:
  - MFSMCG provides extensive guidance on fair value methods and differences with historic cost, amortized, face, and book value (paragraphs 5.44–5.49).
  - having multiple allowed alternatives for fair value is an advantage for memorandum-item compilation but becomes problematic for core accounts because horizontal consistency between counterparties is required when fair valuation is introduced in core accounts.

*Source: IMF Guidance Note F.9 "Valuation of Loans, Fair Value" — SECTION I: THE ISSUE*

### 22. As the pure fair value, the simplified (written down) value in Option 2a takes continuously

### Valuation of Loans — Fair Value (F9)

### Options for loan valuation and key distinctions
- Option 2a: simplified (written down) value treats loans as the pure fair value and "takes continuously into account changes in value arising from impairment," implying loans should be revalued even if not traded.
- Option 2b: fair valuation with discounting using the current or expected discount rate; differs from Option 2a by using the initial/at-inception discount rate instead of the current rate.
- Option 1b: nominal valuation adjusted for extraordinary events; loan values are revised only in cases of extraordinary events or formal procedures.
- Main operational difference: Option 2 variants imply regular use of provisions for impaired loans and revaluation even without transactions, whereas Option 1b limits revisions to extraordinary/public events.

### Data and memorandum-item implications
- If Option 2b is adopted with full shift to fair valuation in the core accounts, new memorandum items should present nominal values of loans (analogous to debt securities).
- Core problem: achieving cross-country consistency that affects the quadruple entry system when creditor records do not match debtor records.
- Use of nominal values as memorandum items can help partially solve inconsistencies between positions reported by creditors and debtors.
- Data availability notes:
  - Aggregate loan loss provisions: generally available.
  - Breakdown of provisions by counterpart: not always available but needed for most datasets; this breakdown is part of the memorandum items recommended by the MFSMCG (paragraph 5.142).

### Fair valuation mechanics and recording
- Fair valuation should account for changes due to both market rates and impairment of loans.
- The discount rate used for valuing future flows may differ from the contractual/inception rate (see MFSMCG, Box 5.1) and can change over time, as can measures for impairment.
- Such changes should be recorded in the revaluation account and reflected in the IIP.
- Contrast with current nominal valuation: nominal valuation does not record price changes; fair valuation would lead to more reliable estimates of net worth and positions but may cause issues for the IIP and financial accounts.
- Practical advantages of fair valuation: connection to real business practice, facilitating use of available information, and reducing reporting burden.

### Sources and practical guidance needs
- Basic sources for applying fair valuation under Option 2b include the 2008 SNA, the BPM6, and other manuals describing alternative methods to compile supplementary data and memorandum items at fair value.
- Additional work required to explain reconciliation between asset and liability sides when different methods are adopted.
- Creditor view offers an easier strategy when both counterparties are resident and sources are available to compilers.
- Specific guidance should be developed for resident–nonresident transactions where information may be available on only one side.

### Advantages and disadvantages of Option 2b
- Advantages:
  - Full consistency with the general principle of market valuation in the SNA and BPM.
  - Better reconciliation with available business accounting data.
  - Alignment with IPSAS 41 and IFRS 9 would permit use of extensive existing guidance.
  - Elimination of unnecessary differences between financial reporting and statistical reporting would improve relevance, understandability, and comparability.
- Downsides:
  - Potential for cross-country inconsistencies.
  - Significant statistical burden of changing current practice.

### Symmetry between debtors and creditors
- Symmetry is a fundamental principle: accounts require the same value in debtor and creditor records (BPM6, paragraphs 3.122–3.125).
- Nominal valuation supports symmetry by being independent of potentially different estimates by the two parties.
- The 2008 SNA sometimes imposes one sector’s view on another to maintain balance (example: write-offs—2008 SNA paragraph 12.40).
- Addressing symmetry via the creditor viewpoint is a commonality across Option 1b, Option 2a, and Option 2b.
- Clarification would be beneficial to ensure consistent recording under the creditor viewpoint; extension of write-offs beyond bankruptcy/liquidation/court orders and guidance on write-off reversal (see MFSMCG, paragraph 5.231) would support reconciliation without asymmetry.

### Outcomes, preferences, and practical considerations
- The Guidance Note (GN) rejects Option 2a and Option 2b and favors Option 1b. One co-author supports Option 2a (nominal value less expected losses or written down value).
- Practical difficulties noted with full market valuation, including issues with the public sector loan portfolio and challenges linking core accounts to memorandum items.
- Cross-border symmetry is unlikely to be achieved in practice because compilers have limited access to partner-country data, both at individual and aggregate levels.
- The fair valuation discussion would extend beyond loans to deposits and accounts receivable/payable; similar valuation issues apply to these instruments (BPM6, paragraph 3.87).
  - For deposits, sales at a fraction of nominal value and provisions for losses are less common, so valuation impact may be less significant.
  - Principle: same valuation criteria should apply across financial instruments; any option other than status quo (Option 1a) would imply corresponding changes for other instruments.
- Majority view among FITT members: maintain nominal valuation of loans, either unchanged or in an extended version adjusted for extraordinary/publicly known events, provided conditions for a loan reset can be tightly defined and limited in scope.
  - Option 1b: strictly limited to extraordinary and publicly known events.
  - An alternative variant (not proposed in the GN) considered transfers of loans being measured at transaction value; this variant did not receive sufficient support.

### Decisions by committees and consensus
- Members of the IMF Committee on Balance of Payments Statistics and the Advisory Expert Group on National Accounts overwhelmingly supported valuation of loans at nominal value (Option 1) over valuation at fair value (Option 2).
- Reasons cited for supporting Option 1:
  - Maintains symmetry between debtors and creditors.
  - Fair value seen as a one-sided assessment of loan repayment risk.
  - Preference driven by pragmatic reasons and data availability.
- A large majority supported extending situations in which loan value should be reset (Option 1b), acknowledging the need to account for public announcements that make nominal valuation clearly unrealistic.
- Recommendations in the Guidance Note were approved by the Committee and the AEG in the October 2021 meeting.

### Relevant SNA excerpts and valuation principles
- 2008 SNA: Chapter 13 (The Balance Sheets) and Chapter 12 (The other changes in assets accounts), plus paragraph 2.60, are most relevant.
- Paragraph 2.60: "Assets and liabilities are recorded at current values at the time to which the balance sheet relates..." and current values may be approximated by accumulation/revaluation of transactions or by discounted present value of future returns.
- Paragraph 13.16: balance sheet items should be valued as if acquired on the date of the balance sheet; financial claims not traded on organized markets are valued at the amount the debtor must pay to extinguish the claim.
- Paragraph 13.18: observable market prices should be used when available; when not, estimate what prices would be on the valuation date.
- Paragraph 13.19: values may be approximated by accumulation and revaluation of transactions or by discounted value of future economic benefits.
- Paragraph 13.54: financial assets traded on organized markets should be valued at current prices; non-traded financial claims should be valued at the amount the debtor must pay to extinguish the claim; assets and liabilities should be assigned the same value whether appearing as assets or liabilities.

*Source: IMF Guidance Note on Valuation of Loans — Fair Value (Guidance Note).*

### Chapter 11 and part 4 of Chapter 17.

### Valuation of Loans — Chapter 11 and part 4 of Chapter 17

### Valuation principles for loans (nominal value vs market/fair value)
- Loans are recorded in balance sheets of creditors and debtors at nominal value: the outstanding principal including any interest that has been earned but not been paid, and any indirectly measured service charge accrued and unpaid (2008 SNA; BPM6; EDS Guide; MFSMCG; MNAFP).
- Nominal value definition: outstanding principal plus accrued interest and subsequent advances less repayments; for instruments denominated in foreign currency it also includes holding gains or losses from exchange rate changes (BPM6; EDS Guide).
- Fair value (market-equivalent value) definition: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction (BPM6; EDS Guide; MNAFP).
- Methods to estimate fair value:
  - Relative valuation: use market prices of similar market-traded instruments and adjust for liquidity or risk differences (BPM6).
  - Absolute valuation: discounted present value of future cash flows using an appropriate discount rate (BPM6).
- Loans that have become negotiable de facto or that trade frequently and have market quotations should be reclassified as debt securities and valued at market value; a one-off trade does not trigger reclassification (2008 SNA; MNAFP).

### Nonperforming loans (NPLs) — identification, recording, and memorandum items
- Common operational definition of a nonperforming loan: payments of interest or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue but other good reasons exist to doubt full payment (2008 SNA; BPM6; MNAFP).
- Once classified as nonperforming, a loan (or any replacement loan) remains classified as NPL until payments are received or the principal is written off or forgiven (2008 SNA).
- Recommended memorandum items for NPLs:
  - Nominal value of loans so designated, including accrued interest and service charge (2008 SNA; MNAFP).
  - Market-equivalent value (closest approximation: fair value); if unavailable, report nominal value less expected loan losses as the second-best approach (2008 SNA; MNAFP).
- Memoranda should be standard for government and financial corporations sectors; if significant, show for other sectors or loans with the rest of the world as supplementary items (2008 SNA).

### Treatment of impaired loan trading and sales at discount or premium
- Loans sold at discount remain classified as loans unless there is evidence of a secondary market with frequent quotations (MFSMCG; 2008 SNA).
- When loans are sold below (above) nominal value:
  - The transaction is recorded at the transaction value in the financial account; positions remain recorded at nominal value (BPM6; BPM6 Compilation Guide; 2008 SNA).
  - The seller records other price changes (revaluation) equal to the difference between nominal and transaction values; the buyer records the opposite amount (BPM6; BPM6 Compilation Guide).
- Example (worked example provided under MNAFP/2008 SNA framework):
  - Opening nominal value of loans: CU 1,300.0.
  - Market (fair) value: CU 800.0.
  - Option 1 — sold at market price (CU 800.0): realized holding loss for seller and realized holding gain for buyer each equal CU 500.0; no net impact on net worth of institutional units.
  - Option 2 — sold above market price at CU 1,000.0: capital transfer from buyer (general government) to seller (deposit-taking corporation) equals CU 200.0 (difference between CU 1,000.0 and CU 800.0); sale results in relocation of assets/liabilities and impacts net worth through the capital transfer.

### Valuation adjustments, expected loan losses, provisions, and write-offs
- Nominal values are not adjusted for expected losses or changes in interest rates; market values may differ from nominal values due to interest rate changes and default risk (BPM6).
- Recommended memorandum and supplementary items to accompany sectoral balance sheets:
  - Total accrued interest on loans (assets and liabilities).
  - Total amount of interest and principal arrears on loans (assets and liabilities).
  - Expected loan losses disaggregated by economic sector of debtor (MFSMCG; 2008 SNA).
  - Loans with maturity of one year or less by currency and counterpart sector; loans extended to nonresident FCs and loans received from them (MFSMCG).
- Expected loan losses:
  - Categories: full loss on unsecured loans; partial loss on unsecured loans; partial loss on secured loans (MFSMCG).
  - Expected loan loss = nominal amount − recoverable amount (present value of expected cash flows or collateral liquidation net of costs) (MFSMCG).
  - Discount rate rules for recoverable amount measurement (consistent with IAS guidance):
    - Use original yield to maturity for calculating present value when measuring recoverable amount of impaired assets.
    - If loan has variable interest rate, use current yield to maturity (MFSMCG).
- Treatment of provisions and write-offs in monetary statistics:
  - Provisions for loan losses are recorded under Other accounts payable [MS]—other and treated as precursor to write-off; OCVA entries record provisioning flows with contra-entries in Equity liability [MS] (Current year result) (MFSMCG).
  - Loan write-offs are recorded as OCVA reductions in the outstanding amount of the financial asset with contra-entry reducing Provisions for loan losses; if insufficient provision exists, the contra-entry reduces Equity liability [MS] (MFSMCG).
  - Reversal of provisions and recoveries are recorded as OCVA entries reversing earlier provisioning with contra-entries to Equity liability [MS] (MFSMCG).
- Impaired loans purchased at a fraction of nominal value remain classified as loans if the purchase is a one-off transaction to preserve ability to post future provisions and write-offs (MFSMCG).

### Other changes in assets connected to debt operations (forgiveness, assumption, rescheduling, defeasance)
- Debt forgiveness by bilateral agreement extinguishes the financial claim and gives rise to a capital transfer payable/receivable recorded in the capital account at the time forgiveness occurs, and a simultaneous extinction of the claim recorded in the financial account (2008 SNA).
- Changes in claims from debt assumption or rescheduling are reflected in the financial account when terms of the debt contract change or when the institutional sector of creditor or debtor changes; write-offs and write-downs without mutual agreement are excluded from the financial account and recorded in other changes in volume of assets (OCVA) (2008 SNA).
- Unilateral cancellation of a financial claim by a debtor (debt repudiation) is not recognized in the 2008 SNA (2008 SNA).
- Debt defeasance (pairing irrevocably assets of equal value to liabilities) does not by itself remove liabilities from SNA:
  - If paired assets/liabilities are placed in a trust within the same unit, no SNA entry removes them.
  - If transferred to another institutional unit, transactions are recorded in the financial account of units concerned and reported in the balance sheet of the unit holding the assets and liabilities (2008 SNA).

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/f9-valuation-of-loans-fair-value.pdf_