## proposed-recommendations-gfsm-2014-update-29-debt-assumption-and-debt-payments-on-behalf-of

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---

### Summary of proposed recommendations
- Update GFSM 2014 guidance on debt assumption to align more closely with the 2025 SNA by replacing the “effective financial claim” / ”going concern” tests with an “effective legal claim” and “realistic probability” criterion, defined consistently with IFRS 9.  
- Apply the same considerations whether or not the beneficiary of the debt assumption is a public corporation.  
- Where the original debtor no longer exists, adopt BPM7 guidance which writes off the original debt and records the new debt via a capital transfer between the new debtor and the creditor.  
- Distinguish debt assumption from debt payments on behalf of others by treating such cases as debt assumption unless evidence demonstrates that the payment is based on temporary liquidity difficulties rather than more permanent solvency problems.  
- For cash-basis reporters, keep the main system unchanged while requiring memorandum reporting of debt assumptions to support fiscal and debt analysis.

### Background and key issues
- Existing GFSM 2014 guidance on debt assumption may be inconsistent with guidance for similar transactions (capital injections and debt forgiveness) and with other statistical manuals, particularly for cases where a government assumes the debt of a public corporation.  
- Several forms of government financial support (capital injections, debt forgiveness, subsidies, capital transfers) are intended to strengthen public corporations but are recorded differently; GFSM 2014’s current treatment of debt assumption is common to PSDSG 2013 (paragraphs 4.56-4.57) and GFSM 2014 (paragraphs A3.26-A3.29) and uses a decision tree (Figure A3.1).  
- Under GFSM 2014, debt assumption can occur (i) with the new debtor acquiring a financial claim on the former debtor, or (ii) without the new debtor acquiring a financial claim on the former debtor.

- Issue A — Treatment of Debt Assumption:
  - GFSM 2014 allows governments to assume debt without an impact on the deficit, differing from debt forgiveness which is always recorded as a capital transfer and affects government net lending/borrowing.  
  - Differences in recording (subsidies for operating losses, capital transfers for accumulated losses) may incentivize governments to assume debt rather than provide other forms of support, reducing transparency.  
  - Conceptual concern where government is sole/full owner of a public corporation: recording debt assumption as an increase in government equity implies no change in government net worth, whereas treating it as a capital transfer would reduce government net worth and increase that of the public corporation.  
  - 2025 SNA relies on an effective legal claim combined with a realistic probability of repayment and does not apply a “going concern” criterion; under 2025 SNA debt assumption is normally recorded as a capital transfer, with recognition of a financial asset only where enforceable legal claims exist and repayment is realistically expected.  
  - Eurostat’s MGDD 2022 treats debt assumption as a capital transfer with a narrowly defined exception for privatization-related cases.

- Issue B — Debt Assumption When the Former Debtor No Longer Exists:
  - GFSM 2014 lacks guidance where the former debtor no longer exists; BPM6 and BPM7 specify the new debtor should record a capital transfer or grant to the creditor and the original debt should be written off through other volume changes in assets and liabilities.

- Issue C — Treatment of Debt Payments on Behalf of Others:
  - GFSM 2014 indicates debt payments on behalf of others are intended for temporary liquidity difficulties rather than permanent solvency problems but gives no further guidance on how to determine classification.  
  - Eurostat’s MGDD 2022 applies a rules-based approach including a “three consecutive calls rule,” treating debt as automatically assumed if the guarantor makes payments over three successive calls unless evidence supports a lower expected share; also identifies debt assumption where public accounts show a high probability the guarantor will repay.

- Issue D — Treatment under Cash Basis of Recording:
  - GFSM 2014 (paragraph A3.29) advises no transactions recorded for debt assumption under cash basis; this hampers debt analysis and fiscal sustainability and vulnerability analysis.  
  - IMF surveillance typically asks for information on debt assumptions regardless of cash basis reporting.

### Proposed recommendations (detailed)
- To address Issue A:
  - In line with the 2025 SNA (paragraph 30.116), revise GFSM 2014 guidance to use the “effective legal claim” and “realistic probability” criterion, replacing “effective financial claim” and “going concern.”  
  - Revise decision tree A3.1 (Decision Tree for the Statistical Treatment of Debt Assumption) in GFSM 2014 accordingly.  
  - Define “effective legal claim” and “realistic probability” in line with definitions used in IFRS 9.

- To address Issue B:
  - Adopt BPM7 guidance (paragraph 8.43(a)) for cases in which the original debtor no longer exists: the new debtor should record a capital transfer or grant to the creditor, and the original debt should be written off through other volume changes in assets and liabilities.  
  - Revise decision tree A3.1 by adding a node (or footnote) addressing cases where the original debtor no longer exists.

- To address Issue C:
  - Maintain current GFSM 2014 guidance as baseline, while adding guidance for compilers to assess whether the debtor’s financial situation reflects temporary liquidity difficulties or permanent solvency problems. Under this approach, record the payment as debt assumption unless evidence demonstrates temporary liquidity difficulties rather than permanent solvency problems.

- To address Issue D:
  - Keep cash basis of recording in the main reporting system (i.e., no debt assumption recording) while recording debt assumption transactions as memorandum items.

### Rationale for recommendations
- Proposed changes strengthen guidance by improving internal consistency within GFSM and aligning the treatment of similar transactions intended to support the finances of public corporations, particularly debt assumption and debt payments on behalf of others.  
- Changes simplify application by compilers and improve debt analysis.

### Proposed text excerpts for GFSM update (selected highlights)
- A3.26 defines debt assumption as a trilateral agreement between a creditor, a former debtor, and a new debtor (typically a government unit) under which the new debtor assumes the former debtor’s outstanding liability to the creditor and is liable for repayment; calling a guarantee is an example of debt assumption.  
- A3.27 describes that when a government assumes a debt, in most instances the counterpart transaction of the new government liability is a capital transfer in favor of the defaulting debtor, unless the government acquires an effective legal claim and there is a realistic probability that the claim will be paid, in which case a financial asset (most commonly equity) equal to the present value of the amount expected may be recorded. If expected recovery is less than the liability assumed, record a capital transfer for the difference.  
- The proposed text retains three possibilities (see Figure A3.1):
  - The debt assumer acquires an effective financial claim on the original debtor: debt liabilities increase and financial assets (loans) increase; gross debt increases by the amount of debt assumed.  
  - The debt assumer does not acquire an effective financial claim on the original debtor (original debtor bankrupt or no longer a going concern, or benefit conveyed): debt assumer records an expense in the form of a capital transfer/grant and an increase in debt liabilities to the original creditor.  
  - The debt assumer does not acquire an effective financial claim and the original debtor is a public corporation that continues to be a going concern: debt assumer records an increase in debt liabilities to the creditor and an increase in financial assets in the form of equity; the public corporation records a decrease in debt liability and an increase in nondebt liabilities in the form of equity.
- Proposed definitions:
  - An effective legal claim exists when the debt‑assuming unit has an enforceable contractual or legal right to receive cash or another financial asset from the former debtor, supported by valid contracts, agreements, or other legal instruments binding under applicable law, with no material legal impediments, disputes, or conditions that would undermine enforceability.  
  - A realistic probability of repayment exists when, based on all available and relevant information, there is a reasonable expectation that the former debtor will repay all or part of the claim; assessment should consider the former debtor’s financial position, payment history, projected cash flows, prevailing economic conditions, and any credit enhancements such as guarantees or collateral.
- If the debt-assuming party does not acquire a claim because the original debtor no longer exists (e.g., liquidated), a capital transfer from the debt-assuming party to the creditor is recorded as the corresponding entry to the creation of the liability, and the original debt is written off in the accounts of both the original debtor and the creditor (recorded as other changes in the volume of assets and liabilities).  
- A3.28 addresses debt assumption involving transfer of nonfinancial assets: record increase in debt liabilities to the creditor and acquisition of nonfinancial assets; record a capital transfer/grant for any difference between liability assumed and market value of nonfinancial assets.  
- A3.29 reiterates that under cash basis no transactions are recorded for debt assumption (stock positions would change); subsequent cash payments are recorded as interest and/or transactions in financial assets other than cash and liabilities as relevant; debt assumptions should be reported as memorandum items to support fiscal and debt analysis.  
- A3.30 clarifies that debt payments on behalf of others (repaying or making a specific payment on behalf of another unit without a guarantee being called or debt taken over) should be recorded as debt assumption unless evidence demonstrates temporary liquidity difficulties rather than permanent solvency problems; the debt stays recorded on the balance sheet of the original debtor where the only legal debtor remains unchanged.

### Assessment of debtor liquidity versus solvency
- Compilers should assess whether the debtor faces temporary liquidity difficulties or permanent solvency problems using a holistic, evidence‑based judgment informed by multiple indicators.  
- Characteristics typically associated with temporary liquidity difficulties:
  - short‑term cash flow mismatches
  - no material increase in credit risk
  - temporary operational disruptions
  - supportive economic conditions
  - credible plans or support mechanisms to meet obligations
- Characteristics typically associated with permanent solvency problems:
  - persistent financial distress
  - repeated defaults or arrears
  - adverse economic or legal developments
  - insolvency or restructuring proceedings
  - weak solvency positions
  - absence of a viable plan to continue operations
- Forward‑looking information should be used where available, and no single indicator should be considered determinative.

### Treatment of debt payments on behalf of others (A3.31)
- The accounting treatment depends on whether the public sector unit paying the debt acquires an effective financial claim on the debtor.

- If the paying unit obtains an effective financial claim on the original debtor:
  - The paying unit records an increase in financial assets (e.g., loans) and a decrease in currency and deposits.  
  - The recipient (debtor) records a decrease in the original debt liability and an increase in another liability—which may be debt or nondebt—to the paying unit.  
  - If the claim of the paying unit on the debtor is in the form of a debt instrument:
    - gross debt and net debt of the paying unit and recipient (debtor) do not change.  
  - If the claim of the paying unit on the debtor is in the form of a nondebt instrument (for example, equity):
    - For the paying unit, gross debt remains unchanged, but net debt increases (due to the reduction in its financial assets in the form of currency and deposits).  
    - For the recipient (debtor), gross debt and net debt decrease (due to the reduction in the debt liability).

- If the paying unit does not obtain an effective financial claim on the original debtor:
  - The paying unit records an expense in the form of a capital transfer—classified according to the nature of the recipient—and a decrease in financial assets in the form of currency and deposits.  
  - The receiving unit (debtor) records a revenue in the form of a capital transfer—classified according to the nature of the paying unit—and a decrease in the original debt liability.

- Clarification: Debt payments on behalf of others are different from the case where debt may be considered to be assumed at inception when a guarantee has a very high likelihood to be called, as described in paragraph 7.258.

*International Monetary Fund, proposed recommendations GFSM 2014 update 29, Section 2.*

### Section 1

### proposed-recommendations-gfsm-2014-update-29-debt-assumption-and-debt-payments-on-behalf-of - Section 1

### Summary of proposed recommendations
- Update GFSM 2014 guidance on debt assumption to align more closely with the 2025 SNA by replacing the “effective financial claim” / ”going concern” tests with an “effective legal claim” and “realistic probability” criterion, defined consistently with IFRS 9.  
- Apply the same considerations whether or not the beneficiary of the debt assumption is a public corporation.  
- Where the original debtor no longer exists, adopt BPM7 guidance which writes off the original debt and records the new debt via a capital transfer between the new debtor and the creditor.  
- Distinguish debt assumption from debt payments on behalf of others by treating such cases as debt assumption unless evidence demonstrates that the payment is based on temporary liquidity difficulties rather than more permanent solvency problems.  
- For cash-basis reporters, keep the main system unchanged while requiring memorandum reporting of debt assumptions to support fiscal and debt analysis.

### Background and key issues
- Existing GFSM 2014 guidance on debt assumption may be inconsistent with guidance for similar transactions (capital injections and debt forgiveness) and with other statistical manuals, particularly for cases where a government assumes the debt of a public corporation.  
- Several forms of government financial support (capital injections, debt forgiveness, subsidies, capital transfers) are intended to strengthen public corporations but are recorded differently; GFSM 2014’s current treatment of debt assumption is common to PSDSG 2013 (paragraphs 4.56-4.57) and GFSM 2014 (paragraphs A3.26-A3.29) and uses a decision tree (Figure A3.1).  
- Under GFSM 2014, debt assumption can occur (i) with the new debtor acquiring a financial claim on the former debtor, or (ii) without the new debtor acquiring a financial claim on the former debtor.  
- Issue A — Treatment of Debt Assumption:
  - GFSM 2014 allows governments to assume debt without an impact on the deficit, differing from debt forgiveness which is always recorded as a capital transfer and affects government net lending/borrowing.  
  - Differences in recording (subsidies for operating losses, capital transfers for accumulated losses) may incentivize governments to assume debt rather than provide other forms of support, reducing transparency.  
  - Conceptual concern where government is sole/full owner of a public corporation: recording debt assumption as an increase in government equity implies no change in government net worth, whereas treating it as a capital transfer would reduce government net worth and increase that of the public corporation.  
  - 2025 SNA relies on an effective legal claim combined with a realistic probability of repayment and does not apply a “going concern” criterion; under 2025 SNA debt assumption is normally recorded as a capital transfer, with recognition of a financial asset only where enforceable legal claims exist and repayment is realistically expected.  
  - Eurostat’s MGDD 2022 treats debt assumption as a capital transfer with a narrowly defined exception for privatization-related cases.
- Issue B — Debt Assumption When the Former Debtor No Longer Exists:
  - GFSM 2014 lacks guidance where the former debtor no longer exists; BPM6 and BPM7 specify the new debtor should record a capital transfer or grant to the creditor and the original debt should be written off through other volume changes in assets and liabilities.
- Issue C — Treatment of Debt Payments on Behalf of Others:
  - GFSM 2014 indicates debt payments on behalf of others are intended for temporary liquidity difficulties rather than permanent solvency problems but gives no further guidance on how to determine classification.  
  - Eurostat’s MGDD 2022 applies a rules-based approach including a “three consecutive calls rule,” treating debt as automatically assumed if the guarantor makes payments over three successive calls unless evidence supports a lower expected share; also identifies debt assumption where public accounts show a high probability the guarantor will repay.
- Issue D — Treatment under Cash Basis of Recording:
  - GFSM 2014 (paragraph A3.29) advises no transactions recorded for debt assumption under cash basis; this hampers debt analysis and fiscal sustainability and vulnerability analysis.  
  - IMF surveillance typically asks for information on debt assumptions regardless of cash basis reporting.

### Proposed recommendations (detailed)
- To address Issue A:
  - In line with the 2025 SNA (paragraph 30.116), revise GFSM 2014 guidance to use the “effective legal claim” and “realistic probability” criterion, replacing “effective financial claim” and “going concern.”  
  - Revise decision tree A3.1 (Decision Tree for the Statistical Treatment of Debt Assumption) in GFSM 2014 accordingly.  
  - Define “effective legal claim” and “realistic probability” in line with definitions used in IFRS 9.
- To address Issue B:
  - Adopt BPM7 guidance (paragraph 8.43(a)) for cases in which the original debtor no longer exists: the new debtor should record a capital transfer or grant to the creditor, and the original debt should be written off through other volume changes in assets and liabilities.  
  - Revise decision tree A3.1 by adding a node (or footnote) addressing cases where the original debtor no longer exists.
- To address Issue C:
  - Maintain current GFSM 2014 guidance as baseline, while adding guidance for compilers to assess whether the debtor’s financial situation reflects temporary liquidity difficulties or permanent solvency problems. Under this approach, record the payment as debt assumption unless evidence demonstrates temporary liquidity difficulties rather than permanent solvency problems.
- To address Issue D:
  - Keep cash basis of recording in the main reporting system (i.e., no debt assumption recording) while recording debt assumption transactions as memorandum items.

### Rationale for recommendations
- Proposed changes strengthen guidance by improving internal consistency within GFSM and aligning the treatment of similar transactions intended to support the finances of public corporations, particularly debt assumption and debt payments on behalf of others.  
- Changes simplify application by compilers and improve debt analysis.

### Proposed text excerpts for GFSM update (selected highlights)
- A3.26 defines debt assumption as a trilateral agreement between a creditor, a former debtor, and a new debtor (typically a government unit) under which the new debtor assumes the former debtor’s outstanding liability to the creditor and is liable for repayment; calling a guarantee is an example of debt assumption.  
- A3.27 describes that when a government assumes a debt, in most instances the counterpart transaction of the new government liability is a capital transfer in favor of the defaulting debtor, unless the government acquires an effective legal claim and there is a realistic probability that the claim will be paid, in which case a financial asset (most commonly equity) equal to the present value of the amount expected may be recorded. If expected recovery is less than the liability assumed, record a capital transfer for the difference.  
- The proposed text retains three possibilities (see Figure A3.1):
  - The debt assumer acquires an effective financial claim on the original debtor: debt liabilities increase and financial assets (loans) increase; gross debt increases by the amount of debt assumed.  
  - The debt assumer does not acquire an effective financial claim on the original debtor (original debtor bankrupt or no longer a going concern, or benefit conveyed): debt assumer records an expense in the form of a capital transfer/grant and an increase in debt liabilities to the original creditor.  
  - The debt assumer does not acquire an effective financial claim and the original debtor is a public corporation that continues to be a going concern: debt assumer records an increase in debt liabilities to the creditor and an increase in financial assets in the form of equity; the public corporation records a decrease in debt liability and an increase in nondebt liabilities in the form of equity.
- Proposed definitions:
  - An effective legal claim exists when the debt‑assuming unit has an enforceable contractual or legal right to receive cash or another financial asset from the former debtor, supported by valid contracts, agreements, or other legal instruments binding under applicable law, with no material legal impediments, disputes, or conditions that would undermine enforceability.  
  - A realistic probability of repayment exists when, based on all available and relevant information, there is a reasonable expectation that the former debtor will repay all or part of the claim; assessment should consider the former debtor’s financial position, payment history, projected cash flows, prevailing economic conditions, and any credit enhancements such as guarantees or collateral.
- If the debt-assuming party does not acquire a claim because the original debtor no longer exists (e.g., liquidated), a capital transfer from the debt-assuming party to the creditor is recorded as the corresponding entry to the creation of the liability, and the original debt is written off in the accounts of both the original debtor and the creditor (recorded as other changes in the volume of assets and liabilities).  
- A3.28 addresses debt assumption involving transfer of nonfinancial assets: record increase in debt liabilities to the creditor and acquisition of nonfinancial assets; record a capital transfer/grant for any difference between liability assumed and market value of nonfinancial assets.  
- A3.29 reiterates that under cash basis no transactions are recorded for debt assumption (stock positions would change); subsequent cash payments are recorded as interest and/or transactions in financial assets other than cash and liabilities as relevant; debt assumptions should be reported as memorandum items to support fiscal and debt analysis.  
- A3.30 clarifies that debt payments on behalf of others (repaying or making a specific payment on behalf of another unit without a guarantee being called or debt taken over) should be recorded as debt assumption unless evidence demonstrates temporary liquidity difficulties rather than permanent solvency problems; the debt stays recorded on the balance sheet of the original debtor where the only legal debtor remains unchanged.

*Source: GFSM 2014 update — Proposed Recommendations Document: 2.9 Debt assumption and debt payments on behalf of others (Global Consultation: GFSM: March 2026; GFSAC Meeting(s): October 2025).*

### Section 2

### proposed-recommendations-gfsm-2014-update-29-debt-assumption-and-debt-payments-on-behalf-of - Section 2

### Assessment of debtor liquidity versus solvency
- Compilers should assess whether the debtor faces temporary liquidity difficulties or permanent solvency problems using a holistic, evidence‑based judgment informed by multiple indicators.
- Characteristics typically associated with temporary liquidity difficulties:
  - short‑term cash flow mismatches
  - no material increase in credit risk
  - temporary operational disruptions
  - supportive economic conditions
  - credible plans or support mechanisms to meet obligations
- Characteristics typically associated with permanent solvency problems:
  - persistent financial distress
  - repeated defaults or arrears
  - adverse economic or legal developments
  - insolvency or restructuring proceedings
  - weak solvency positions
  - absence of a viable plan to continue operations
- Forward‑looking information should be used where available, and no single indicator should be considered determinative.
- Footnote reference: 9

### Treatment of debt payments on behalf of others (A3.31)
- The accounting treatment depends on whether the public sector unit paying the debt acquires an effective financial claim on the debtor.
- If the paying unit obtains an effective financial claim on the original debtor:
  - The paying unit records an increase in financial assets (e.g., loans) and a decrease in currency and deposits.
  - The recipient (debtor) records a decrease in the original debt liability and an increase in another liability—which may be debt or nondebt—to the paying unit.
  - If the claim of the paying unit on the debtor is in the form of a debt instrument:
    - gross debt and net debt of the paying unit and recipient (debtor) do not change.
  - If the claim of the paying unit on the debtor is in the form of a nondebt instrument (for example, equity):
    - For the paying unit, gross debt remains unchanged, but net debt increases (due to the reduction in its financial assets in the form of currency and deposits).
    - For the recipient (debtor), gross debt and net debt decrease (due to the reduction in the debt liability).
- If the paying unit does not obtain an effective financial claim on the original debtor:
  - The paying unit records an expense in the form of a capital transfer—classified according to the nature of the recipient—and a decrease in financial assets in the form of currency and deposits.
  - The receiving unit (debtor) records a revenue in the form of a capital transfer—classified according to the nature of the paying unit—and a decrease in the original debt liability.
- Clarification: Debt payments on behalf of others are different from the case where debt may be considered to be assumed at inception when a guarantee has a very high likelihood to be called, as described in paragraph 7.258.
- Footnote reference: 9

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_Source: https://www.imf.org/-/media/files/data/statistics/gfsm/global-consultations/proposed-recommendations-gfsm-2014-update-29-debt-assumption-and-debt-payments-on-behalf-of.pdf_