Part E - The valuation of flows and stock positions in GFS

In the GFS system, all flows and stock positions are measured at the current market price. Flows recorded in the GFS statement of operations should be valued at the market price on the date that the flow takes place, while flows recorded in the GFS Statement of sources and uses of cash should be valued at their monetary value at the time the cash flow occurred. Stock positions should be valued at the prices current on the balance sheet date or on the date that a change in the nature of the asset or liability occurs in the case of acquisitions, disposals or reclassifications.

The market value is defined in paragraph 3.108 of the IMF GFSM 2014 as amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commercial considerations only, sometimes called 'at arm’s length'. According to this definition, a market price refers only to the price for one specific exchange under the stated conditions. A second exchange of an identical unit (even under circumstances that are almost exactly the same), could result in a different market price.

Paragraph 3.109 of the IMF GFSM 2014 indicates that when a price is agreed to by both parties in advance of a transaction taking place, this agreed (or contractual) price is the market price for that transaction regardless of the prices that prevail when the transaction takes place. Paragraph 3.110 of the IMF GFSM 2014 states that actual exchange values, expressed in monetary terms, are presumed to be the market prices in most cases. A market price is the price payable by the buyer after taking into account any rebates, refunds, adjustments, etc., from the seller.

All transactions in GFS are valued at current market value. Paragraph 3.111 of the IMF GFSM 2014 recommends that transactions in financial assets and liabilities are recorded exclusive of any commissions, fees, and taxes regardless of whether these are charged explicitly, included in the purchaser’s price, or deducted from the seller’s proceeds. The valuation of financial instruments (such as securities) differ from the valuation of non-financial assets (such as buildings or equipment, with the exception of land) because they exclude the costs of ownership transfer. This is because both debtors and creditors should record the same amount for the same financial instrument in each of their accounts. The commissions, fees, and / or taxes and similar payments for services that are necessary to acquire a financial asset or incur a liability should be recorded separately from the transaction under the appropriate categories of revenue or expense. A summary treatment of the costs of ownership transfer is demonstrated in Table 3.3 below:

Where market prices for transactions are not observable (such as for some barter or transfers in kind transactions), paragraph 3.112 of the IMF GFSM 2014 indicates that valuation based on market price equivalents may provide an approximation to market prices. In such cases, the market price of the same or similar items (when such prices exist) provide a good basis for applying the principle of market prices. Generally, market prices should be taken from the markets where the same or similar items are traded currently, in sufficient numbers and in similar circumstances. If there is no appropriate market in which a particular good or service is currently traded, the valuation of a transaction involving that good or service may be derived from the market price of similar goods and services by making adjustments to the price for quality and other differences.

Stock positions should be valued at the current market value, as if they were acquired in a market transaction on the balance sheet reporting date (also known as the reference date). Current market prices are readily available for assets and liabilities that are traded in active markets. Paragraphs 3.113 to 3.116 of the IMF GFSM 2014 state that assets and liabilities that are not traded in markets (or are traded only infrequently), need to be valued according to their market value equivalent. For these assets and liabilities, it is necessary to estimate fair values that approximate market prices. The present value of future cash flows may be used as an approximation to market prices, provided an appropriate discount rate is used.

Paragraph 3.125 of the IMF GFSM 2014 provides guidance on how to estimate the current market value of flows and stocks without the presence of an active market. This information has been reproduced in Box 3.2 below.

Paragraph 3.115 of the IMF GFSM 2014 lists some other valuation methods which may be analytically useful and appropriate to compare against current market values:

• Fair value - this is a market-equivalent value defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. It represents an estimate of what could be obtained if the creditor sold the financial claim or settled the liability.
• Nominal value - this is the amount that the debtor owes to the creditor at any moment in time. It reflects the value of the instrument at creation and subsequent economic flows, such as transactions, valuation changes (excluding market price changes), and other changes, such as debt forgiveness. Conceptually, the nominal value is equal to the required future payments of principal and interest discounted at the existing contractual interest rate. For financial instruments other than debt securities, equity, and financial derivatives, nominal value can be taken as a proxy for market value.
• Amortised value - this reflects the amount at which the financial asset or liability was measured at initial recognition minus the principal repayments. Excess payments over the scheduled principal repayments reduce the amortised value whereas payments that are less than the scheduled principal repayments or scheduled interest increase the amortised value. On each scheduled date, amortised value is the same as nominal value, but it may differ from the nominal value on other dates due to the accrued interest being included in the nominal value.
• Face value - this is the undiscounted amount of principal to be repaid at maturity. The use of face value as a proxy for nominal value in measuring the gross debt position can result in an inconsistent approach across all instruments and is not recommended. For example, the face value of deep discounted bonds and zero-coupon bonds includes interest not yet accrued, which runs counter to accrual principles.
• Written-down replacement cost - this is the current acquisition price of an equivalent new asset minus the accumulated consumption of fixed capital, amortisation, or depletion.
• Book value - this refers to the value recorded in the entities’ records. Book values may have different meanings because their values are influenced by accounting standards, rules, and policies, as well as the timing of acquisition, company takeovers, frequency of revaluations, and tax and other regulations.
• Historic cost - this reflects the cost of an asset at the time of acquisition.

Paragraphs 3.118 to 3.125 of the IMF GFSM 2014 provide the following guidance on special cases where valuation adjustments may be needed to reflect correct values of flow and stock positions:

• Where a unit sells an item and does not receive the corresponding payment for an unusually long time, and the amount of trade credit extended is large, then the value of the sale should be reduced by means of an appropriate discount rate and interest should be accrued until the actual payment is made.
• Where flow and stock positions are expressed in a foreign currency, flows need to be converted to their value in the domestic currency, at the rate prevailing at the moment the transactions or other flow takes place, and stocks need to be converted at the rate prevailing on the balance sheet date. The midpoint between the buying and selling rates should be used so that any service charge is excluded.
• Where the valuation in domestic currency of a purchase or sale on credit expressed in a foreign currency is different because the exchange rate changed in the interim, both transactions should be valued at their current market values as of the dates they actually occurred, and a holding gain or loss resulting from the change in the exchange rate should be recorded for the period or periods in which it occurs.
• Where a contract establishes a quotation period for a transaction in goods months after the goods have changed hands, the market value at the time of the change of ownership of the goods should be initially estimated, and revised with the actual market value when known. Market value is given by the contract price even if it is unknown at the time of change of ownership.
• Transfers in kind should be valued at the market price that would have been receivable if the resources had been sold in the market. In the absence of a market price, the donor’s view of the imputed value of the transaction will often be quite different from that of the recipient. The suggested rule of thumb is to use the value assigned by the donor as a basis of recording.
• Where a single payable/receivable refers to more than one transaction category, the individual flows should be partitioned and recorded separately. In such a case, the total value of the individual transactions after partitioning must equal the market value of the exchange that actually occurred.

Some transactions may take place at implied prices that include a grant or concession which means they are offered at below market prices. This is the case with concessional lending arrangements entered into by government. Paragraph 3.123 of the IMF GFSM 2014 states that while there is no precise definition of concessional loans, it is generally accepted that they occur when units lend to other units and the contractual interest rate is intentionally set below the market interest rate that would otherwise apply. Concessional loans effectively include a transfer from the creditor to the debtor, and the degree of concessionality can be enhanced with grace periods, frequencies of payments and a maturity period favourable to the debtor. With the exception of concessional lending to government employees and concessional lending by central banks, concessional debt is recorded as a memorandum item in GFS. Further discussion on the treatment of concessional loans in GFS may be found in Chapter 13, and Appendix 1 Part B of this manual.

Apart from transactions, the change in the value of assets and liabilities between two reporting periods may also result in holding gains and / or losses, and other changes in the volume of assets and liabilities.

Holding gains and / or losses occur if the value of an asset or liability changes during the time that it is held without changing in quality or quantity, or otherwise transforming or altering the asset or liability in any way. Holding gains and losses are recorded between the beginning of the accounting period (or the time an asset was acquired or produced during the accounting period); and the end of the accounting period or the time an asset is relinquished or consumed.

Holding gains and losses accrue continuously and apply to both non-financial assets and financial assets and liabilities in the statement of total changes in net worth (see Chapter 11 of this manual for further discussion). In GFS, holding gains and losses that occur during a reporting period are shown separately as flows related to the asset or liability in question. Since all financial assets (except monetary gold in the form of gold bullion held as reserve assets) are matched by liabilities (either within the domestic economy or with the rest of the world), it is important that holding gains or losses are recorded symmetrically. Table 3.4 below illustrates the recording of holding gains and losses.

Differences in the value of non-financial assets that are not explained by transactions or through holding gains or losses, are due to other changes in the volume of assets and liabilities. This is where the quality and / or quantity of an asset or liability is affected through events such as fires, floods, earthquakes, natural growth in stocks of biological assets such as fish or virgin forests, unilateral action (e.g. debt write-off or annexation of new territories) or changes to the classification or structure of an asset or liability.

Paragraph 3.128 of the IMF GFSM 2014 indicates that in order to determine the valuation of the other changes in the volume of non-financial assets, the asset value needs to be examined both before and after the change in volume event so that any difference that is not explained by transactions or holding gains and losses is the value of the other volume change. Other changes in the volume of financial assets and liabilities are recorded at the current market equivalent prices of similar instruments. For all reclassifications of assets and liabilities, the value of both the new and old instruments should be the same.

Further discussion on other changes in the volume of assets and liabilities may be found in Chapter 11 of this manual.