Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community

• 5.151. A main advantage of this method is its flexibility. In cases where the definition of a measure of money is changed, only the breakdowns of some classes of financial assets and liabilities into MXi and MX-i have to be adapted.

Measures of money in the balance sheets or the financial accounts

Financial assets of money-holding sectors	Financial assets of money-holding sectors			Liabilities of money-creating sectors	Liabilities of money-creating sectors
Total	Breakdown by sectors			Breakdown by sectors	Total
				AF.1
				AF.2
		of which	MX2
		of which	MX-2
		AF.3
		AF.33
		of which	MX33
		of which	MX-33
		AF.34
		of which	MX34
		of which	MX-34
		AF.4
		AF.41
		of which	MX41
		of which	MX-41
		AF.42
		of which	MX42
		of which	MX-42
		AF.5
		AF.51
		of which	MX51
		of which	MX-51
		AF.52
		of which	MX52
		of which	MX-52
		AF.6
		AF.7
		AF.71
		of which	MX71
		of which	MX-71
		AF.79
		Total of financial assets and liabilities of which MX	Total of financial assets and liabilities of which MX

CHAPTER 6

OTHER FLOWS

• 6.01. Other flows cover consumption of fixed capital (K.1), acquisitions and disposals of non-financial non-produced assets (K.2) and other changes in assets (K.3 to K.12).

The other changes in assets consist of different kinds of changes in assets, liabilities and net worth which are not the result of transactions being recorded in the capital and financial accounts. They cover other changes in volume (K.3 to K.10 and K.12) and also holding gains and losses (K.11).

CONSUMPTION OF FIXED CAPITAL (K.1)

• 6.02. | | | | --- | --- | | Definition: | Consumption of fixed capital (K.1) represents the amount of fixed assets used up, during the period under consideration, as a result of normal wear and tear and foreseeable obsolescence, including a provision for losses of fixed assets as a result of accidental damage which can be insured against. |

• 6.03. Consumption of fixed capital must be calculated for all fixed assets (except animals), including both tangible fixed assets and intangible fixed assets such as mineral exploration costs and software, major improvements to non-produced assets and costs of ownership transfers associated with non-produced assets.

• 6.04. Consumption of fixed capital (which should be distinguished from the depreciation allowed for tax purposes or the depreciation shown in business accounts) should be estimated on the basis of the stock of fixed assets and the probable average economic life of the different categories of those goods. For the calculation of the stock of fixed assets, the perpetual inventory method (PIM) is recommended whenever direct information on the stock of fixed assets is missing. The stock of fixed assets should be valued at the purchasers' prices of the current period.

Losses of fixed assets occurring as a result of accidental damage which can be insured against are taken into account in calculating the average service life of the goods in question. For the economy as a whole the actual normal accidental damage within a given accounting period may be expected to be equal, or close, to the average. However, for individual units and groupings of units actual normal and average accidental damage may differ. In this case, for sectors, any difference is recorded as other changes in volume of fixed assets.

Consumption of fixed capital is calculated according to the ‘straight line’ method, by which the value of a fixed asset is written off at a constant rate over the whole lifetime of the good.

However, depending on the pattern of decline in the efficiency of a fixed asset the calculation of consumption of fixed capital according to the geometric depreciation method may be required.

• 6.05. In the system of accounts consumption of fixed capital is recorded below each balancing item, which is shown gross and net. Recording ‘gross’ means without deducting consumption of fixed capital, while recording ‘net’ means after deducting consumption of fixed capital.

ACQUISITIONS LESS DISPOSALS OF NON-FINANCIAL NON-PRODUCED ASSETS (K.2)

• 6.06. Definition : Non-financial non-produced assets ([^E0088]) consist of land and other tangible non-produced assets that may be used in the production of goods and services, and intangible non-produced assets.

• 6.07. Land is defined as the ground itself, including soil covering and associated surface water (87) . The associated surface water includes any inland waters (reservoirs, lakes, rivers, etc.) over which ownership rights can be exercised.

• 6.08. The following items are not included in land:

• (a) buildings or other structures on the land or through it (roads, tunnels, etc.);

• (b) vineyards, orchards, or other plantations of trees and any growing crops, etc.;

• (c) subsoil assets;

• (d) non-cultivated biological resources;

• (e) water resources below the ground.

Items (a) and (b) are produced fixed assets, items (c), (d) and (e) belong to tangible non-produced assets.

• 6.09. Acquisitions and disposals of land are valued at current market prices prevailing at the time the acquisitions/disposals occur. Transactions in land are recorded at the same value both in the accounts of the purchaser and in those of the seller. This value excludes the costs involved in the transfer of ownership of land, which are treated as gross fixed capital formation.

• 6.10. Acquisitions and disposals of other tangible non-produced assets cover subsoil assets, non-cultivated biological resources and water resources. Subsoil assets include coal, oil and natural gas reserves, metallic mineral reserves and non-metallic mineral reserves (87) .

• 6.11. Acquisitions and disposals of other tangible non-produced assets are valued at current market prices prevailing at the time the acquisitions/diposals occur. Acquisitions and disposals exclude the associated costs of ownership transfer. The latter are recorded as gross fixed capital formation.

• 6.12. Intangible non-financial non-produced assets consist of patented entities, leases or other transferable contracts, purchased goodwill and other intangible non-produced assets. Such leases are on land, subsoil assets and residential and non-residential buildings (87) . Further examples include transferable contracts with athletes and authors. The value of the acquisitions or disposals of leases or other transferable contracts consists of payments made to the original or subsequent tenants or lessees when the leases or concessions are sold or transferred to other institutional units. The value of acquisitions and disposals of intangible non-produced assets excludes the associated costs of ownership transfer. The costs of ownership transfer are a component of gross fixed capital formation.

• 6.13. Acquisitions less disposals of non-financial non-produced assets are recorded in the capital account of the sectors, the total economy and the rest of the world.

OTHER CHANGES IN ASSETS (K.3 to K.12)

• 6.14. | | | | --- | --- | | Definition: | Other changes in assets are flows which are not the result of transactions recorded in the capital and financial accounts. Two kinds of other changes are distinguished. The first kind consists of changes in the volume of assets. The second consists of changes in the value of assets, liabilities and net worth due to changes in the level and structure of prices leading to holding gains or losses. |

OTHER CHANGES IN VOLUME (K.3 to K.10 AND K.12)

• 6.15. Other changes in volume are flows with different functions. One important function is to allow certain assets to enter and leave the system in the normal course of events — e.g. entrances and exits of naturally occurring assets. This is important for recording the discovery, depletion and degradation of natural assets. A second function is to record the effect of exceptional, unanticipated events that affect the economic benefits derivable from assets.

• 6.16. The other changes in volume cover nine categories:

• (a) economic appearance of non-produced assets (K.3);

• (b) economic appearance of produced assets (K.4);

• (c) natural growth of non-cultivated biological resources (K.5);

• (d) economic disappearance of non-produced assets (K.6);

• (e) catastrophic losses (K.7);

• (f) uncompensated seizures (K.8);

• (h) other volume changes in non-financial assets n.e.c. (K.9);

• (i) other volume changes in financial assets and liabilities n.e.c. (K.10);

• (j) changes in classifications and structure (K.12).

ECONOMIC APPEARANCE OF NON-PRODUCED ASSETS (K.3)

• 6.17. Economic appearance of non-financial non-produced assets (K.3) represents the increase in the volume of this kind of assets that is not the result of production.

Included are:

• (a) gross increases in the level of exploitable subsoil resources: proven reserves of coal, oil, natural gas, metallic minerals or non-metallic minerals that are economically exploitable. This also covers the increase in reserves for which exploitation becomes economic as a result of technological progress or relative price changes;

• (b) transfers of other natural assets to economic activity: naturally occuring entities that change status to qualify as economic assets, economic assets being entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by their owners (e.g. exploitation of virgin forests, transfer of land from a wild or waste state to land that can be put to economic use, land reclamation);

• (c) quality changes in non-produced assets due to changes in economic uses. Changes in quality are treated as changes in volume. The quality changes recorded here occur as the counterpart of the changes in economic use that are shown as changes in classification (see paragraph 6.32.) — e.g. from cultivated land to land underlying buildings;

• (d) appearance of intangible non-produced assets. Intangible non-financial non-produced assets arise when entities are patented or transferable contracts are written. Also when enterprises are sold at prices that exceed their own funds (see paragraph 7.05), the excess of purchase price over own funds is the asset ‘purchased goodwill’. Goodwill not evidenced by a sale/purchase is not considered as an economic asset.

ECONOMIC APPEARANCE OF PRODUCED ASSETS (K.4)

• 6.18. Economic appearance of produced assets (K.4) occurs in the case of goods that are not already recorded in the Balance Sheets. It is the recognition of a significant or special value that is considered an economic appearance to be recorded under other changes in volume.

Economic appearance of produced assets includes:

• (a) valuables, such as precious stones and art objects, when the high value or artistic significance of an object not already recorded in the Balance Sheets is first recognized;

• (b) historic monuments, when the special archaeological, historical or cultural significance of a structure or site not already recorded in the Balance Sheets is first recognized.

NATURAL GROWTH OF NON-CULTIVATED BIOLOGICAL RESOURCES (K.5)

• 6.19. Natural growth of non-cultivated biological resources (K.5) is not under the direct control, responsibility and management of an institutional unit and thus is not production. The increment in these economic assets such as standing natural timber, or fish in the estuaries, must then be regarded as an economic appearance.

• 6.20. Natural growth should be recorded as an addition (K.5); the depletion of these resources should be recorded as an economic disappearance (K.61). In practice, however, natural growth can only be recorded net because the physical measurements that are likely to be the only basis available for the recording are, in effect, net measurements.

ECONOMIC DISAPPEARANCE OF NON-PRODUCED ASSETS (K.6)

• 6.21. Economic disappearance on non-financial non-produced assets (K.6) includes:

• (a) depletion of natural economic assets (K.61), which covers the reduction of deposits of subsoil assets and the depletion of non-cultivated biological resources included in the asset boundary (see paragraph 6.19);

• (b) other economic disappearance of non-produced assets (K.62):
• 1. other reductions in the level of exploitable subsoil resources (reassessments of exploitability due to changes in technology or relative prices);
• 1. quality change in non-produced assets due to changes in economic uses;
• 1. degradation of non-produced assets due to economic activity. Covered is degradation of land, water resources and in principle of other natural assets;
• 1. write-off of purchased goodwill, cancellation of transferable contracts and exhaustion of patent protection.

CATASTROPHIC LOSSES (K.7)

• 6.22. Catastrophic losses (K.7) recorded as other changes in the volume of assets are the result of large-scale, discrete and recognizable events that may destroy items within any of the categories of economic (non-financial or financial) assets.

• 6.23. Such events include major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, drought and other natural disasters; acts of war, riots and other political events; and technological accidents such as major toxic spills or release of radioactive particles into the air.

Included here are in particular:

• (a) deterioration in the quality of land caused by abnormal flooding or wind damage;

• (b) destruction of cultivated assets by drought or outbreak of disease;

• (c) destruction of buildings, equipment or valuables in forest fires or earthquakes;

• (d) accidental destruction of currency or bearer securities as a result of natural catastrophes or political events.

UNCOMPENSATED SEIZURES (K.8)

• 6.24. Uncompensated seizures (K.8) occur when governments or other institutional units take possession of the assets of other institutional units, including non-resident units, without full compensation, for reasons other than the payment of taxes, fines or similar levies. The uncompensated part of such unilateral seizures is not a capital transfer recorded in the capital account.

OTHER VOLUME CHANGES IN NON-FINANCIAL ASSETS N.E.C. (K.9)

• 6.25. Under other volume changes in non-financial assets (K.9) are recorded the effects of unexpected events on the economic benefits derivable from assets.

Included are:

• (a) unforeseen obsolescence. Consumption of fixed capital does not cover unforeseen obsolescence in fixed assets, and the amount included for their normally expected obsolescence may fall short of the actual obsolescence. Entries must, therefore, be made for the decline in the value of the fixed assets resulting from the introduction of improved technology;

• (b) differences between allowances included in consumption of fixed capital for normal damage and actual losses. Consumption of fixed capital does not cover unforeseen damage, and the amount included for their normally expected damage may fall short (or exceed) the actual damage. Adjustments must therefore be made for the unforeseen decline (or increase) in the value of the fixed assets due to these events;

• (c) degradation of fixed assets not accounted for in consumption of fixed capital: decline in the value of fixed assets from, for example, the unforeseen effects of acidity in air and rain on building surfaces or vehicle bodies;

• (d) abandonment of production facilities before completion or being brought into economic use;

• (e) exceptional losses in inventories (e.g. from fire damage, from robberies, from insect infestation of grain stores);

• (f) statistical discrepancies concerning non-financial assets between the closing balance sheet and the corresponding opening balance sheet.

OTHER VOLUME CHANGES IN FINANCIAL ASSETS AND LIABILITIES N.E.C. (K.10)

• 6.26. Any changes in financial assets and liabilities that are not due to financial transactions recorded in the financial account, that are not attributed to holding gains and losses recorded in the revaluation account, that are not changes in classifications and structure and that are not due to catastrophic losses and uncompensated seizures are to be recorded here.

• 6.27. Category K.10 includes:

• (a) allocations and cancellations of SDRs (AF.12) (see paragraphs 5.33 to 5.35): For SDRs not even a notional liability exists. Therefore, the mechanism by which SDRs are created (referred to as allocations of SDRs) and extinguished (cancellations of SDRs) is not treated as one that gives rise to transactions but rather to entries in the other changes in the volume of assets account. Allocations of SDRs increase the financial assets of the monetary authorities, cancellations of SDRs decrease their financial assets;

• (b) other volume changes related to defined benefit pension funds. Defined benefit pension schemes are those in which the level of pension benefits promised to participating employees is guaranteed. Benefits are related by some formula to participants' length of service and salary and are not totally dependent on the assets in the fund. For defined benefit schemes, an entry in the other changes in the volume of assets account captures changes in the actuarially determined liability that result from changes in benefits structure, which are to be distinguished from changes in the age and service composition of the beneficiary pool. Examples of changes in benefit structure include changes in the formula, reductions in the pensionable age, or funding for an annual increase (usually defined as constant × per cent per year) in future pensions or in all pensions in the course of payment;

• (c) exceptional losses of currency or bearer securities because of, e.g., fire damage or theft;

• (d) writing-off or writing-down of bad debts by creditors. Unilateral recognition by a creditor that a financial asset can no longer be collected, due to bankruptcy or other factors, and the consequent removal by the creditor of that financial asset from his balance sheet should be accounted for here, along with the removal of the counterpart liability of the debtor. However, in cases where the debtor institutional unit is controlled by the creditor, the writing-off or writing-down of debt by the creditor, not due to bankruptcy, is recorded in the accumulation accounts. By derogation from the general principle, this heading does not include taxes and social contributions payable to the general government that the general government unilaterally recognises as unlikely to be collected. Taxes and social contributions payable to the general government and unlikely to be collected are, in the same accounting period which has generated the liability, neutralised in the calculation of the net lending/net borrowing of the general government sector and of the counterpart sectors (see point 1.57);

• (e) statistical discrepancies concerning financial assets and liabilities between the closing balance sheet and the corresponding opening balance sheet.

• 6.28. Category K.10 does not include:

• (a) cancellation of debt by mutual agreement between debtor and creditor (debt cancellation or debt forgiveness): it is treated as a transaction between the creditor and the debtor (see paragraph 4.165. f and 5.16) and not as another change of volume;

• (b) debt repudiation: the unilateral cancellation of a liability by a debtor is not recognized in the system.

CHANGES IN CLASSIFICATIONS AND STRUCTURE (K.12)

• 6.29. Changes in classifications and structure (K.12) comprise changes in sector classification and structure of institutional units (K.12.1) and changes in classification of assets and liabilities (K.12.2).

CHANGES IN SECTOR CLASSIFICATION AND STRUCTURE (K.12.1)

• 6.30. Reclassifying an institutional unit from one sector to another transfers its entire balance sheet, e.g. an institutional unit classified in the household sector becomes a quasi-corporation to be reclassified in the corporations sector.

Changes in structure of institutional units cover appearance and disappearance of certain financial assets and liabilities arising from corporate restructuring. When a corporation disappears as an independent legal entity because it is absorbed by one or more corporations, all financial assets/liabilities including shares and other equity that existed between that corporation and those that absorbed it, disappear from the system. However, the purchase of shares and other equity of a corporation as part of a merger is to be recorded as a financial transaction between the purchasing corporation and the previous owner. Replacement of existing shares by shares in the take-over or new corporation are to be recorded as redemptions of shares accompanied by the issue of new shares. Financial assets/liabilities that existed between the absorbed corporation and third parties remain unchanged and pass to the absorbing corporation(s).

Symmetrically, when a corporation is legally split up into two or more institutional units, new financial assets and liabilities (appearance of financial assets) are recorded in this category (K.12.1).

CHANGES IN CLASSIFICATION OF ASSETS AND LIABILITIES (K.12.2)

• 6.31. Category K.12.2 distinguishes monetization/demonetization of gold (K.12.21) and changes in classification of assets or liabilities other than monetization/demonetization of gold (K.12.22).

• 6.32. Monetization/demonetization of gold (K.12.21) is recorded in the other changes in the volume of assets account of the monetary authorities, that is to say in the subsector the central bank (S.121) or central government (S.1311).

Monetization of gold occurs when the monetary authorities reclassify gold from stocks of valuables to reserve assets held by the monetary authorities. The other changes in the volume of assets account records then a decrease in their holding of valuables and an increase in their holding of monetary gold.

Purchases of monetary gold directly from other monetary authorities are classified as transactions in monetary gold (F.11). All other purchases, including those from financial intermediaries or via an organized gold market must be recorded as purchase of valuables followed by a classification change.

Demonetization of gold occurs when the monetary authorities transfer gold from reserve assets to valuables. Holdings of monetary gold by monetary authorities then decrease and valuables show an increase. Sales of monetary gold directly to other monetary authorities are classified as transactions in monetary gold (F.11). All other sales, including those to financial intermediaries or via an organized gold market must be recorded as sales of valuables preceded by a classification change.

• 6.33. Changes in classification of assets or liabilities other than monetization/demonetization of gold (K.12.22): examples are changes in land use or conversions of dwellings to commercial use or vice versa. In the case of land both entries (a negative entry for the old category, a positive one for the new category) have to be made with the same value in the category K.12.22. The change in land value resulting from this change in use is recorded in economic appearance (see paragraph 6.17 c) or disappearance of non-produced assets (see paragraph 6.21 c) considered as volume changes.

K.12.22 does not include the conversion of bonds into shares. This conversion is recorded as two financial transactions (see paragraph 562. l).

• 6.34. Entries for other changes in volume (K.3 to K.10 and K.12) are recorded in the other changes in the volume of assets accounts of the sectors, the total economy and the rest of the world.

NOMINAL HOLDING GAINS/LOSSES (K.11)

• 6.35. Nominal holding gains ([^E0089]) are that category of other changes in the value of assets, liabilities and therefore net worth which reflects the changes in the level and structure of their prices. Nominal holding gains are broken down into neutral holding gains and real holding gains.

• 6.36. | | | | --- | --- | | Definition: | The nominal holding gain (K.11) on a given quantity of an asset is defined as the change in value for the owner of that asset as a result of a change in its price. The nominal holding gain on a liability is defined as the change in value of that liability as a result of a change in its price, but with the sign reversed. |

• 6.37. A positive holding gain is due to an increase in the value of a given asset or to a reduction in the value of a given liability. A negative holding gain, i.e. a holding loss, is due to a reduction in the value of a given asset or an increase in the value of a given liability.

• 6.38. The nominal holding gains recorded in the revaluation account are those accruing on assets or liabilities, whether realized or not. A holding gain is said to be realized when the asset in question is sold, redeemed, used or otherwise disposed of, or the liability repaid. An unrealised gain is therefore one accruing on an asset that is still owned or a liability that is still outstanding at the end of the accounting period. A realized gain is usually understood as the gain realized over the entire period over which the asset is owned or liability outstanding whether this period coincides with the accounting period or not. However, as holding gains are recorded on an accruals basis in the system, the distinction between realized and unrealized gains, although useful for some purposes, does not appear in the classifications and accounts.

• 6.39. Holding gains include gains on all kinds of assets: non-financial produced and non-produced assets, and financial assets. Thus, holding gains on inventories of all kinds of goods held by producers, including work in progress, are also covered.

• 6.40. Nominal holding gains may accrue on assets held for any length of time during the accounting period and not merely on assets that appear in the opening and/or closing balance sheets. The nominal holding gain accruing to the owner of a particular asset, or given quantity of a specific type of asset, between two points of time is defined as:

the current value of that asset at the later point of time,

minus

the current value of that asset at the earlier point of time,

assuming that the asset itself does not change, qualitatively or quantitatively, in the meanwhile. The nominal holding gain (G) accruing on a given quantity q of some asset between times o and t can be expressed as follows:

Image omitted; see official source

where po and pt are the prices of the asset at times o and t respectively. For financial assets and liabilities with fixed current values for which both po and pt are unity by definition, nominal holding gains are always zero.

• 6.41. For purposes of calculating nominal holding gains, acquisitions and disposals of assets must be valued in the same way as in the capital and financial accounts and stocks of assets must be valued in the same way as in the balance sheets. In the case of fixed assets the value of an acquisition is the amount paid by the purchaser to the producer, or seller, plus the associated costs of ownership transfer incurred by the purchaser. The value of a disposal of an existing fixed asset is the amount received by the seller from the purchaser minus the costs of ownership transfer incurred by the seller.

Four different situations giving rise to nominal holding gains may be distinguished:

• 1. an asset held throughout the accounting period: the nominal holding gain accruing during the accounting period is equal to the closing balance sheet value minus the opening balance sheet value. These values are the estimated values of the assets if they were to be acquired at the times the balance sheets are drawn up. The nominal gain is unrealized;

• 1. an asset held at the beginning of the period that is sold during the period: the nominal holding gain accruing is equal to the actual or estimated disposal value minus the opening balance sheet value. The nominal gain is realized;

• 1. an asset acquired during the period and still held at the end of the period: the nominal holding gain accruing is equal to the closing balance sheet value minus the actual, or estimated, acquisition value of the asset. The nominal gain is unrealized;

• 1. an asset acquired and disposed of during the accounting period: the nominal holding gain accruing is equal to the actual, or estimated, disposal value minus the actual, or estimated, acquisition value. The nominal gain is realized.

• 6.42. The nominal holding gains included are those accruing on assets and liabilities, whether realized or not. They are recorded in the revaluation account of the sectors, the total economy and the rest of the world.

NEUTRAL HOLDING GAINS/LOSSES (K.11.1)

• 6.43. | | | | --- | --- | | Definition: | The neutral holding gain (K.11.1) on an asset is defined as the value of the holding gain that would accrue if the price of the asset changed over time in the same proportion as the general price level. |

Neutral holding gains are identified to facilitate the derivation of real holding gains which redistribute real purchasing power between sectors.

• 6.44. Let the general price index be denoted by r. The neutral holding gain (NG) on a given quantity q of an asset between times o and t is then given by the following expression:

Image omitted; see official source

where po × q is the current value of the asset at time o and rt/ro the factor of the change in the general price index between times o and t. The same term rt/ro is applied to all assets and liabilities.

• 6.45. There is no ideal general price index appropriate to calculate neutral holding gains. By convention, the general price index to be applied for the calculation of neutral holding gains is the price index for final national uses excluding changes in inventories.

• 6.46. Neutral holding gains are recorded in the neutral holding gains/losses account, which is a sub-account of the revaluation account of the sectors, the total economy and the rest of the world.

REAL HOLDING GAINS/LOSSES (K.11.2)

• 6.47. | | | | --- | --- | | Definition: | The real holding gain (K.11.2) on an asset is defined as the difference between the nominal and the neutral holding gain on that asset. |

The real holding gain (RG) on a given quantity q of an asset between times o and t is given by:

Image omitted; see official source

or

Image omitted; see official source

The values of the real holding gains on assets thus depend on the movements of their prices over the period in question, relative to movements of other prices, on average, as measured by the general price index.

• 6.48. Real holding gains are recorded in the real holding gains/losses account, which is a sub-account of the revaluation account of the sectors, the total economy and the rest of the world.

HOLDING GAINS BY TYPE OF FINANCIAL ASSET

Currency and deposits (AF.2)

• 6.49. The current values of currency and deposits denominated in national currency remain constant over time. The ‘price’ of such an asset is always unity while the quantity is given by the number of units of the currency in which they are denominated. The nominal holding gains on such assets are always zero. For this reason, the difference between the values of the opening and closing stocks of such assets is, with the exception of the other changes in the volume of assets, entirely accounted for by the values of the transactions in the assets. This being one case in which it is normally possible to deduce the latter from the balance sheet figures.

• 6.50. In order to calculate the neutral and real holding gains on assets of fixed current value, however, data on the times and values of transactions are needed as well as the opening and closing balance sheet values. Suppose, for example, a loan is made and repaid within the accounting period while the general price level is rising. The neutral gain on the loan is positive and the real gain negative from the creditor's point of view, the amount depending upon the length of time the loan is outstanding and the rate of inflation. It is impossible to record such real losses without data on the value of the loans made and repaid during the accounting period and the times at which they are made and repaid. In general, it may be inferred that if the total absolute value of the positive and negative transactions is large in relation to the opening and closing balance sheet levels, approximate estimates of the neutral and real holding gains on financial assets and liabilities with fixed current values derived from balance sheet data alone may not be very satisfactory. Even recording the values of financial transactions on a gross basis, i.e. recording loans made and repaid separately as distinct from the total value of loans minus repayments, may not be sufficient without information on the timing of the loans.

Loans (AF.4) and other accounts receivable/payable (AF.7)

• 6.51. The same as for currency and deposits applies for loans and other accounts receivable/payable, which are not traded. However, when an existing loan or trade credit is sold to another institutional unit the difference between the redemption price and the transaction price should be recorded under the revaluation account of the seller and the purchaser at the time of transaction.

Securities other than shares (AF.3)

• 6.52. When a bond is issued at premium or discount, including deep discounted and zero coupon bonds, the difference between its issue price and its face or redemption value when it matures measures interest that the issuer is obliged to pay over the life of the bond. Such interest is recorded as property income payable by the issuer of the bond and receivable by the holder of the bond in addition to any coupon interest actually paid by the issuer at specified intervals over the life of the bond. The interest accruing is recorded in the financial account as being simultaneously reinvested in the bond by the holder of the bond (see paragraph 5.17). It is, therefore, recorded in the financial account as the acquisition of an asset which is added to the existing asset ([^E0090]). Thus the gradual increase in the market value of a bond that is attributable to the accumulation of accrued, reinvested interest reflects a growth in the principal outstanding — that is, in the size of the asset. It is essentially a quantum or volume increase and not a price increase. It does not generate any holding gain for the holder of the bond or holding loss for the issuer of the bond. The situation is analogous to that of a good, such as wine, that matures while it is being stored. Any increase in the price of the wine that is attributable to an improvement in its quality reflects an increase in volume and not price. Bonds change qualitatively over time as they approach maturity and it is essential to recognize that increases in their values due to the accumulation of accrued interest are not price changes and do not generate holding gains.

• 6.53. The prices of fixed-interest bonds also change, however, when the market rates of interest change, the prices varying inversely with the interest rate movements. The impact of a given interest rate change on the price of an individual bond is less, the closer the bond is to maturity. Changes in bond prices that are attributable to changes in market rates of interest constitute price and not quantum changes. They therefore generate nominal holding gains or losses for both the issuers and the holders of the bonds. An increase in interest rates generates a nominal holding gain for the issuer of the bond and an equal nominal holding loss for the holder of the bond, and vice versa in the case of a fall in interest rates.

Nominal holding gains or losses may accrue on bills in the same way as for bonds. However, as bills are short-term securities with much shorter times to maturity, the holding gains generated by interest rate changes are generally much smaller than on bonds with the same face values.

• 6.54. The conversion of bonds into shares is recorded as two financial transactions (see paragraph 5.62.1). It will usually take place at a price below the market price of the shares and the resulting holding gains are to be recorded as a price change under the revaluation account.

• 6.55. The value of financial derivatives (AF.34) may change as a result of changes in the value of the underlying instrument, changes in the volatility of the price of the underlying instrument, or approaching the date of execution or maturity. All such changes in value should be regarded as price changes and recorded under K.11.

Shares and other equity (AF.5)

• 6.56. Bonus shares (see paragraph 5.93) increase the number of shares and the nominal value of the shares issued but do not in theory alter the market value of the totality of shares. By convention, they do not enter the accounts at all. However, these issues are designed to improve the liquidity of the shares on the market and hence the total market value of shares issued may rise as a result: any such change should be recorded as a revaluation effect.

Insurance technical reserves (AF.6)

• 6.57. Changes in the net equity of households in life insurance reserves and in pension funds reserves (AF.61) that occur between the beginning and the end of the accounting period and that result from nominal holding gains or losses on the reserves invested by insurance corporations and pension funds are recorded in the revaluation account, as well as changes in prepayments of insurance premiums and reserves for outstanding claims (AF.62) resulting from holding gains or losses.

FINANCIAL ASSETS IN FOREIGN CURRENCY

• 6.58. The value of financial assets in foreign currency is measured by their current market value in foreign currency converted into national currency at the current exchange rate. Nominal holding gains may therefore occur not only because the price of the asset in local currency changes but also because the exchange rate changes. The total value of the nominal holding gains accruing over the accounting period may be calculated in the usual way by subtracting the value of transactions from the difference between the opening and closing balance sheet values. For this purpose, transactions in the financial assets in foreign currency must be converted into the national currency using the exchange rates at the time the transactions occur, while the opening and closing balance sheet values must be converted using the exchange rates prevailing at the dates to which the balance sheets relate. This implies that the total value of the transactions — acquisitions less disposals — expressed in foreign currency is, in effect, converted by a weighted average exchange rate in which the weights are given the values of transactions conducted on different dates.

CHAPTER 7

BALANCE SHEETS

• 7.01. | | | | --- | --- | | Definition: | A balance sheet is a statement, drawn up at a particular point in time, of the values of assets owned and of liabilities outstanding. The balancing item is called net worth (B.90). The stock of the assets and liabilities recorded in the balance sheet is valued at the market prices prevailing on the date to which the balance sheet relates. |

• 7.02. A balance sheet is drawn up for sectors, the total economy and the rest of the world.

For a sector the balance sheet provides as a balancing item what is often referred to as national wealth — the sum of non-financial assets and net financial assets with respect to the rest of the world.

The balance sheet for the rest of the world, called the external assets and liabilities account, consists entirely of financial assets and liabilities.

• 7.03. Corporations are seen to have a net worth in addition to the value of the shares and other equity issued. In the case of quasi-corporations, net worth is zero, because the value of the owners' equity is assumed to be equal to its assets less its liabilities. Therefore, the net worth of resident direct investment enterprises, which are branches of non-resident enterprises and are therefore treated as quasi-corporations, is zero.

• 7.04. The difference between total financial assets and total liabilities is called net financial assets (see paragraph 7.67).

• 7.05. For the non-financial and the financial corporations sectors the calculation of own funds provides an analytically meaningful indicator.

Own funds are the sum of net worth (B.90) and shares and other equity (AF.5) issued.

• 7.06. The balance sheet completes the sequence of accounts, showing the ultimate result of the entries in the production, distribution and use of income, and accumulation accounts (see chapter 8: Sequence of accounts and balancing items).

• 7.07. A balance sheet relates to the value of assets and liabilities at a particular moment of time. Balance sheets are to be compiled at the beginning of the accounting period (the same as the end of the preceding period) and at its end.

• 7.08. A basic accounting identity links the opening balance sheet and the closing balance sheet:

the value of the stock of a specific type of asset in the opening balance sheet;	the value of the stock of a specific type of asset in the opening balance sheet;
plus	transactions: the total value of the assets acquired, less the total value of those disposed of, in transactions that take place within the accounting period: transactions in non-financial assets are recorded in the capital account and transactions in financial assets in the financial account;
minus	consumption of fixed capital;
plus	other volume changes: the value of other positive or negative changes in the volume of the assets held (for example, as a result of the discovery of a subsoil asset or the destruction of an asset as a result of war or a natural disaster): these changes are recorded in the other changes in volume of assets account;
plus	revaluations: the value of the positive or negative nominal holding gains accruing during the period resulting from a change in the price of the asset: these changes are recorded in the revaluation account;
is identical with the value of the stock of the asset in the closing balance sheet.	is identical with the value of the stock of the asset in the closing balance sheet.

The accounting links between the opening and closing balance sheets via transactions and other changes in assets (other changes in volume and holding gains) are shown schematically in Annex 7.2.

TYPES OF ASSETS

• 7.09. The assets recorded in the balance sheets are economic assets.

• 7.10. | | | | --- | --- | | Definition: | Economic assets are entities functioning as a store of value over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them or using them over a period of time. |

• 7.11. The economic benefits consist of primary incomes (operating surplus by using, property income by letting others use) derived from the use of the asset and the value, including possible holding gains/losses, that could be realized by disposing of the asset or terminating it.

• 7.12. An overview of the classification and coverage of economic assets is given in the table 7.1. The detailed definition of each asset category is set out in the Annex 7.1 to this chapter.

Excluded from the asset boundary are:

• (a) human capital;

• (b) natural assets that are not economic assets (e.g. air, river water);

• (c) contingent assets, which are not financial assets (see paragraph 7.22).

• 7.13. Three categories of assets are distinguished:

• (a) non-financial produced assets;

• (b) non-financial non-produced assets;

• (c) financial assets.

NON-FINANCIAL PRODUCED ASSETS (AN.1)

• 7.14. | | | | --- | --- | | Definition: | Produced assets (AN.1) are non-financial assets that have come into existence as outputs from production processes. |

• 7.15. The classification of produced assets is designed to distinguish among assets on the basis of their role in production. It consists of: fixed assets ([^E0091]) which are used repeatedly or continuously in production for more than one year; inventories which are used up in production as intermediate consumption, sold or otherwise disposed of; and valuables. The latter are not used primarily for production or consumption, but are instead acquired and held primarily as stores of value.

NON-FINANCIAL NON-PRODUCED ASSETS (AN.2)

• 7.16. | | | | --- | --- | | Definition: | Non-produced assets (AN.2) are economic assets that come into existence other than through processes of production. They consist of tangible assets and intangible assets as defined below. |

• 7.17. The classification is designed to distinguish assets on the basis of the way they come into existence. Some of these assets occur in nature, others, which may be referred to as constructs devised by society, come into existence by legal or accounting actions.

• 7.18. All tangible non-produced assets are natural assets. Which natural assets are included is determined, in compliance with the general definition of an economic asset, by whether the assets are subject to effective ownership and are capable of bringing economic benefits to their owners, given the existing technology, knowledge, economic opportunities, available resources, and set of relative prices. Moreover, natural assets over which ownership rights have not, or cannot, be established, such as open seas or air, are excluded.

• 7.19. Intangible non-produced assets include patented entities, transferable contracts, purchased goodwill, etc. Entities not evidenced by legal or accounting actions — that is, such actions as the granting of a patent or the conveyance of some economic benefit to a third party — are excluded.

FINANCIAL ASSETS AND LIABILITIES (AF.)

• 7.20. | | | | --- | --- | | Definition: | Financial assets (AF.) are economic assets, comprising means of payment, financial claims and economic assets which are close to financial claims in nature. |

• 7.21. Means of payment consist of monetary gold, special drawing rights, currency and transferable deposits. Financial claims entitle their owners, the creditors, to receive a payment or series of payments without any counter-performance from other institutional units, the debtors, who have incurred the counterpart liabilities.

Examples of economic assets which are close to financial claims in nature are shares and other equity and partly contingent assets. The institutional unit issuing such a financial asset is considered to have incurred a counterpart liability.

• 7.22. Contingent assets are contractual arrangements between institutional units, and between them and the rest of the world, which specify one or more conditions which must be fulfilled before a financial transaction takes place. Excamples are guarantees of payment by third parties, letters of credit, lines of credit, underwritten note issuance facilities (NIFs) and many of the derivative instruments. In the system, a contingent asset is a financial asset in cases where the contractual arrangement itself has a market value because it is tradable or can be offset on the market. Otherwise, a contingent asset is not recorded in the system ([^E0092]).

• 7.23. In the system, each financial asset has a counterpart liability, with the exception of those financial assets classified in the category monetary gold and special drawing rights (AF.1).

• 7.24. The classification of financial assets and liabilities corresponds to the classification of financial transactions. Therefore, the definitions of the categories, sub-categories and sub-positions of financial assets and liabilities and the supplementary explanations are provided only once in the ESA — in the financial transactions chapter. The balance sheets chapter does not repeat the definitions and their explanations in its main text but it provides in its Annex 1 a summary of all assets and liabilities defined in the system.

Table 7.1 — Classification of assets

AN.	NON-FINANCIAL ASSETS (AN.1 + AN.2)
AN.1	Produced assets
AN.11	Fixed assets [^E0093]
AN.111	Tangible fixed assets
AN.1111	Dwellings
AN.1112	Other buildings and structures
AN.11121	Non-residential buildings
AN.11122	Other structures
AN.1113	Machinery and equipment
AN.11131	Transport equipment
AN.11132	Other machinery and equipment
AN.1114	Cultivated assets
AN.11141	Livestock for breeding, dairy, draught, etc.
AN.11142	Vineyards, orchards and other plantations of trees yielding repeat products
AN.112	Intangible fixed assets
AN.1121	Mineral exploration
AN.1122	Computer software
AN.1123	Entertainment, literary or artistic originals
AN.1129	Other intangible fixed assets
AN.12	Inventories
AN.121	Materials and supplies
AN.122	Work in progress
AN.1221	Work in progress on cultivated assets
AN.1222	Other work in progress
AN.123	Finished goods
AN.124	Goods for resale
AN.13	Valuables
AN.131	Precious metals and stones
AN.132	Antiques and other art objects
AN.139	Other valuables
AN.2	Non-produced assets
AN.21	Tangible non-produced assets
AN.211	Land
AN.2111	Land underlying buildings and structures
AN.2112	Land under cultivation
AN.2113	Recreational land and associated surface water
AN.2119	Other land and associated surface water
AN.212	Subsoil assets
AN.2121	Coal, oil and natural gas reserves
AN.2122	Metallic mineral reserves
AN.2123	Non-metallic mineral reserves
AN.213	Non-cultivated biological resources
AN.214	Water resources
AN.22	Intangible non-produced assets
AN.221	Patented entities
AN.222	Leases and other transferable contracts
AN.223	Purchased goodwill
AN.229	Other intangible non-produced assets
AF.	FINANCIAL ASSETS [^E0094] (AF.1 + AF.2 + AF.3 + AF.4 + AF.5 + AF.6 + AF.7)
AF.1	Monetary gold and special drawing rights (SDRs)
AF.11	Monetary gold
AF.12	Special drawing rights (SDRs)
AF.2	Currency and deposits
AF.21	Currency
AF.22	Transferable deposits
AF.29	Other deposits
AF.3	Securities other than shares
AF.33	Securities other than shares, excluding financial derivatives
AF.331	Short-term
AF.332	Long-term
AF.34	Financial derivatives
AF.4	Loans
AF.41	Short-term
AF.42	Long-term
AF.5	Shares and other equity
AF.51	Shares and other equity, excluding mutual funds shares
AF.511	Quoted shares
AF.512	Unquoted shares
AF.513	Other equity
AF.52	Mutual funds shares
AF.6	Insurance technical reserves
AF.61	Net equity of households in life insurance reserves and in pension funds reserves
AF.611	Net equity of households in life insurance reserves
AF.612	Net equity of households in pension funds reserves
AF.62	Prepayments of insurance premiums and reserves for outstanding claims
AF.7	Other accounts receivable/payable
AF.71	Trade credits and advances
AF.79	Other

Memorandum item AN.m: consumer durables.

Memorandum item AF.m: direct foreign investment.

VALUATION OF ENTRIES IN THE BALANCE SHEETS

GENERAL VALUATION PRINCIPLES

• 7.25. A particular item in the balance sheet should be valued as if it were being acquired on the date to which the balance sheet relates, including any associated costs of ownership transfer in the case of non-financial assets. This implies that assets and liabilities are to be valued using current market prices on the date to which the balance sheet relates.

This means that assets should be valued on the basis of

• (a) purchasers' prices if they are bought;

• (b) basic prices if they are own-account produced and on the basis of basic prices of similar goods or of the sum of its cost if no basic prices are available.

• 7.26. Ideally, these prices should be prices observable on the market. When there are no observable prices — as may be the case if no purchases/sales of the items in question have been observed in the recent past — an attempt has to be made to estimate what the prices would be if the assets were acquired on the market on the date to which the balance sheet relates.

• 7.27. In addition to prices observed on markets or estimated from observed prices or costs incurred, current prices may be approximated for balance sheet valuation by:

• (a) revaluing and accumulating acquisitions less disposals or

• (b) the present, or discounted, value of future returns.

• 7.28. Market prices are usually available for many of the financial assets, existing real estate (buildings and other structures plus the underlying land), existing transport equipment, crops and livestock as well as for newly produced fixed assets and inventories.

• 7.29. For some assets revalued initial acquisition prices are written off over the asset's expected life. The value of such an asset at a given point in its life is given by its current acquisition price less the accumulated value of these write-offs. Most fixed assets can be recorded in balance sheets at current purchasers' prices written down for the accumulated consumption of fixed capital (written-down replacement cost) ([^E0095]).

• 7.30. In the case of assets for which the returns either are delayed (as with timber) or are spread over a lengthy period (as with subsoil assets), a rate of discount must be used to compute the present value of the expected future returns.

The rate of discount should be derived from information based on transactions in the particular type of assets under consideration — forests, mines and quarries — rather than using a general rate of interest.

• 7.31. The value of assets and liabilities denominated in foreign currencies should be converted into the national currency at the market exchange rate prevailing on the date to which the balance sheet relates. This rate should be the midpoint between the buying and the selling spot rates for currency transactions.

• 7.32. Alternatives to current market values might be useful for some analytical purposes and may be shown as memorandum items in the balance sheets. Examples of alternative valuation include nominal value for long-term bonds and revalued paid-in and equivalent value for corporate equity.

NON-FINANCIAL ASSETS (AN.)

PRODUCED ASSETS (AN.1)

Fixed assets (AN.11)

Tangible fixed assets (AN.111)

• 7.33. Tangible fixed assets have to be recorded at market prices if possible (or basic prices in the case of own-account production of new assets), if not then at current purchasers' prices written down by the accumulated consumption of fixed capital. Purchasers' costs of ownership transfer associated with these assets, appropriately written down, are included in the balance sheet value.

Intangible fixed assets (AN.112)

• 7.34. Mineral exploration should be valued either on the basis of the accumulated amounts paid under contracts awarded to other institutional units for the purpose, or on the basis of the costs incurred for exploration undertaken on own account. That part of exploration undertaken in the past that has not yet been fully written off should be revalued at the prices and costs of the current period.

• 7.35. Computer software should be valued on the basis of the purchasers' price paid on the market, on the basis of estimated basic prices when produced in house, or on the basis of costs of production when such prices are not available. Software acquired in previous years and not yet fully written down should be revalued at current prices or costs (which may be less then the original price or cost).

• 7.36. Entertainment, literary or artistic originals and other intangible fixed assets should be valued at the acquisition price when these intangible assets are actually traded on markets. In the case of intangible assets that have been produced on own account, it may be necessary to value them on the basis of their costs of production, appropriately revalued at prices of the current period and written down. Otherwise, it may be necessary to use estimates of the present value of the expected future receipts to be received by owners of such assets.

Inventories (AN.12)

• 7.37. Inventories should be valued at prices prevailing on the date to which the balance sheet relates, and not at the prices at which the products were valued when they entered inventory.

• 7.38. Inventories of materials and supplies are valued at purchasers' prices, and inventories of finished goods and work in progress are valued at basic prices. Inventories of goods intended for resale without further processing by wholesalers and retailers are valued at the prices prevailing on the date to which the balance sheet relates, excluding any transportation costs incurred by the wholesalers or retailers. For work-in-progress inventories, the value of the closing balance sheet can be calculated by applying the fraction of the total production cost incurred by the end of the period to the basic price of a similar finished product on the date to which the balance sheet relates. If the basic price of the finished products is not available, it can be estimated by the value of the production cost with a mark-up for expected net operating surplus or (estimated net) mixed income.

Growing single-use crops (except timber) and livestock being raised for slaughter can be valued by reference to the prices of such products on the markets. Standing timber is valued by discounting the future proceeds of selling the timber at current prices after deducting the expenses of bringing the timber to maturity, felling, etc.

Valuables (AN.13)

• 7.39. Valuables (works of art, antiques, jewellery, precious stones, non-monetary gold (see paragraph 5.30) and other metals) are to be valued at current prices. To the extent that organized markets exist for these assets, they should be valued at the actual or estimated prices that would be paid for them were they purchased on the market, including any agents' fees or commissions, on the date to which the balance sheet relates. Otherwise, they should be valued at acquisition prices revalued to the current price level.

NON-PRODUCED ASSETS (AN.2)

Tangible non-produced assets (AN.21)

Land (AN.211)

• 7.40. In the capital account, expenditures on land improvements and the costs of ownership transfer on land are recorded as gross fixed capital formation, separately from land itself.

If the value of the land cannot be separated from that of the buildings or other structures situated on it, the assets have to be classified together on the basis of which is likely the larger value.

In the balance sheet land is valued at its current market price.

This price does not necessarily equal the sum of all components constituting the costs of acquiring the land at the time of acquisition. Particularly the current market price may not cover the costs of ownership transfer or expenditures on land improvements not already written off to zero. So it may be necessary to enter these amounts, either completely or in part, as holding losses in the revaluation account.

Subsoil assets (AN.212)

• 7.41. Proven reserves of mineral deposits located on or below the earth's surface that are economically exploitable given current technology and relative prices are valued by the present value of expected net returns resulting from the commercial exploitation of those assets.

Other natural assets (AN.213 and AN.214)

• 7.42. As observed prices for these assets are not likely to be available, they have to be valued by the present value of future returns expected from them.

Intangible non-produced assets (AN.22)

• 7.43. Intangible non-produced assets (patented entities, leases or other transferable contracts, and purchased goodwill) should be valued at current prices when they are actually traded on markets. Otherwise, estimates of the present value of the expected future returns to be received by the owners of such assets will have to be made.

FINANCIAL ASSETS AND LIABILITIES (AF.)

• 7.44. Financial assets and liabilites should in principle be valued at current prices. They should be assigned the same value whether they appear as financial assets or liabilities. The prices should exclude service charges, fees, commissions and similar payments which are recorded as services provided in carrying out the transactions.

Monetary gold and SDRs (AF.1)

• 7.45. Monetary gold (AF.11) is to be valued at the price established in organized gold markets.

The value of SDRs (AF.12) is determined daily by the IMF and the rates against domestic currencies are obtainable from foreign exchange markets.

Currency and deposits (AF.2)

• 7.46. For currency (AF.21), the valuation is the nominal or face value of the currency.

For deposits (AF.22, AF.29), the values to be recorded in the balance sheets are the amounts of principal that the debtors are contractually obliged to repay the creditors under the terms of the deposits when the deposits would be liquidated on the date the balance is set up. The values may include accrued interest (see paragraph 5.130).

Securities other than shares (AF.3)

• 7.47. The valuation adopted must be consistent with the treatment of accrued interest and its classification to specific asset headings (see paragraph 5.128, 5.130, 5.138). If accrued interest has been treated in the financial account as being reinvested in the corresponding securities, then, in the balance sheet, securities other than shares, excluding financial derivatives, (AF.33) should be valued at current market prices in such a way that they include the value of the accrued interest. The global current market value of these securities has two distinct volume components, one representing the principal and the other the accrued interest. The global total volume thus includes the accrued interest (i.e., it is the number of units of securities in issue plus the supplementary volume resulting from accrued interest, see paragraph 6.52) and the price to be applied to each of those units of volume excludes accrued interest.

If, in the financial account, the value of accrued interest has been included under F.79 (Other accounts receivable/payable) rather than F.33 (Securities other than shares, excluding financial derivatives), then the value of accrued interest should also be included under AF.79 in the balance sheet.

• 7.48. Short-term securities other than shares excluding financial derivatives (AF.331) are to be valued at their current market values.

If current market values are not available:

• (a) short-term securities issued at par should be valued at face value plus accrued interest not due for payment or not paid;

• (b) discounted securities should be valued at the issue price plus accrued interest.

These approximations should be restricted to securities whose original maturity does not exceed three months.

• 7.49. Long-term securities other than shares excluding financial derivatives (AF.332) are always to be valued at their current market values, whether they are bonds on which interest is paid regularly or deep-discounted or zero-coupon bonds on which little or no interest is paid.

• 7.50. Financial derivatives (AF.34) should be included in the balance sheets at their current market prices. In the case that no quoted market price exists (e.g. OTC options), a financial derivative should be valued at either the amount required to buy out or to offset the contract or the amount of premium paid.

By convention, the issuer of a financial derivative is considered to have incurred a counterpart liability.

Loans (AF.4)

• 7.51. The values to be recorded in the balance sheets of both creditors and debtors are the amounts of principal that the debtors are contractually obliged to repay the creditors, even in cases where the loan was traded at a discount or premium.

Shares and other equity (AF.5)

• 7.52. Shares and other equity are to be valued at their current prices. The same current price is adopted for both the asset side and the liability side, although shares and other equity are not, legally, a liability of the issuer, but an ownership right on the liquidation value of the corporation, whose amount is not known in advance.

• 7.53. Quoted shares (AF.511) are to be valued at a representative mid-market price observed on the stock exchange or other organized financial markets.

• 7.54. The values of unquoted shares (AF.512), which are not regularly traded on organized markets, should be estimated with reference to the values of quoted shares. However, these estimates should take into account differences between the two types of shares, notably their liquidity, and they should consider the reserves accumulated over the life of the corporation and its branch of business.

• 7.55. The estimation method applied depends very much on the basic statistics available. It may take into account, for example, data on merger activities involving unquoted shares. Furthermore, in cases where the reserves of corporations, which issue unquoted shares, differ on average, and in proportion to their nominal capital, from that of corporations, which issue unquoted shares, it would be appropriate to calculate the current price of unquoted shares in proportion to figures including reserves, such as net worth given by the corporation balance sheet, or as own funds compiled according to ESA principles:

Image omitted; see official source

The ratio of current price to own funds may vary with the branch of business. Therefore, it is preferable to calculate the current price of unquoted shares branch by branch. There may be other differences between quoted and unquoted corporations, which may have an effect on the estimation method.

• 7.56. Other equity (AF.513) is very often a liability of specific institutional units (quasi-corporations, corporations owned by the state, international organizations, notional units, etc.). In general, they have to be valued according to specific methods, such as own funds or nominal value. The own funds method is notably to be used systematically for quasi-corporations, since their net worth is by convention equal to zero.

• 7.57. Mutual funds shares (AF.52) are to be valued at their current stock exchange price, if they are quoted, or at their current redemption value, if they are redeemable by the fund itself.

Insurance technical reserves (AF.6)

• 7.58. In the case of net equity of households in life insurance reserves (AF.611), the present value of the individuals' actuarially determined claims to the payment of capital or income can be ascertained. This value includes the liability of life insurance corporations for reserves against outstanding risks and reserves for with-profit insurance that add to the value on maturity of with-profit endowments or similar policies. In the case of with-profit insurance, the reserves include holding gains.

• 7.59. In the case of net equity of households on pension funds reserves (AF.612), the nature of the liability of the funds — and financial asset of the households — depends on the kind of pension scheme.

Defined benefit pension schemes are those in which the level of pension benefits promised to participating employees is guaranteed. The liability of a defined benefit pension scheme is equal to the present value of the promised benefits. As the scheme may be temporarily over or underfunded, a defined benefit pension scheme may have a positive or negative net worth.

Money purchase pension schemes are those for which benefits are directly dependent on the assets of the fund. The liability of a money purchase pension scheme is the current market value of the funds' assets. The funds' net worth is always zero.

• 7.60. The value of the prepayments of insurance premiums, which are part of AF.62, is determined on the basis of the proportion of the risks involved in relation to time for the time remaining on the contract. The value of the reserves for outstanding claims, which are also part of AF.62, is the present value of the amounts expected to be paid out in settlement of claims, including disputed claims.

Other accounts receivable/payable (AF.7)

• 7.61. Trade credits and advances (AF.71) or other items receivable/payable (AF.79) are to be valued for both creditors and debtors at the amount the debtors are contractually obliged to pay the creditors when the obligation is extinguished.