1. Copyright 2010, The World Bank Group. All Rights Reserved. 1 GOVERNMENT FINANCE STATISTICS TRANSACTIONS IN FINANCIAL ASSETS AND LIABILITIES Part 2 This lecture describes the two classifications of financial assets and liabilities and the various debt-related transactions in which a general government unit may be involved.

2. Copyright 2010, The World Bank Group. All Rights Reserved. 2 GOVERNMENT FINANCE STATISTICS CLASSIFICATION OF TRANSACTIONS IN FINANCIAL ASSETS AND LIABILITIES The classification of financial assets and liabilities has a dual classification: - by type of financial instrument and residence, and - by sector and residence of the counterparty. The lecture on the Balance Sheet provides definitions of the financial assets and liabilities.

3. Copyright 2010, The World Bank Group. All Rights Reserved. 3 GOVERNMENT FINANCE STATISTICS CLASSIFICATION BY TYPE OF FINANCIAL INSTRUMENT – Financial Assets 32 Financial assets 321 Domestic 3212 Currency and deposits 3213 Securities other than shares 3214 Loans 3215 Shares and other equity 3216 Insurance technical reserves 3217 Financial derivatives 3218 Other accounts receivable 322 Foreign 3222 Currency and deposits 3223 Securities other than shares 3224 Loans 3225 Shares and other equity 3226 Insurance technical reserves 3227 Financial derivatives 3228 Other accounts receivable 323 Monetary gold and SDRs

4. Copyright 2010, The World Bank Group. All Rights Reserved. 4 GOVERNMENT FINANCE STATISTICS CLASSIFICATION BY TYPE OF FINANCIAL INSTRUMENT - Liabilities 33 Liabilities 331 Domestic 3312 Currency and deposits 3313 Securities other than shares 3314 Loans 3315 Shares and other equity (public corporations only) 3316 Insurance technical reserves [GFS] 3317 Financial derivatives 3318 Other accounts payable 332 Foreign 3322 Currency and deposits 3323 Securities other than shares 3324 Loans 3325 Shares and other equity (public corporations only) 3326 Insurance technical reserves [GFS] 3327 Financial derivatives 3328 Other accounts payable

5. Copyright 2010, The World Bank Group. All Rights Reserved. 5 GOVERNMENT FINANCE STATISTICS Currency and deposits (3212, 3222, 3312, 3322), Securities other than shares (3213, 3223, 3313, 3323), Loans (3214, 3224, 3314, 3324), Shares and other equity (3215, 3225, 3315, 3325). TRANSACTION DESCRIPTION

6. Copyright 2010, The World Bank Group. All Rights Reserved. 6 GOVERNMENT FINANCE STATISTICS Insurance technical reserves (3216, 3226, 3316, 3326), Financial derivatives (3217, 3227, 3317, 3327), Other accounts receivable/payable (3218, 3228, 3318, 3328), Monetary gold and SDRs (323). TRANSACTION DESCRIPTION

7. Copyright 2010, The World Bank Group. All Rights Reserved. 7 GOVERNMENT FINANCE STATISTICS CLASSIFICATION BY SECTOR OF COUNTERPARTY Financial Assets 82 Financial assets 821 Domestic 8211 General government 8212 Central bank 8213 Other depository corporations 8214 Financial corporations not elsewhere classified 8215 Nonfinancial corporations 8216 Households and nonprofit institutions serving households 822 Foreign 8221 General government 8227 International organizations 8228 Financial corporations other than international organizations 8229 Other nonresidents 823 Monetary gold and SDRs

8. Copyright 2010, The World Bank Group. All Rights Reserved. 8 GOVERNMENT FINANCE STATISTICS CLASSIFICATION BY SECTOR OF COUNTERPARTY Liabilities 83 Liabilities 831 Domestic 8311 General government 8312 Central bank 8313 Other depository corporations 8314 Financial corporations not elsewhere classified 8315 Nonfinancial corporations 8316 Households and nonprofit institutions serving households 832 Foreign 8321 General government 8327 International organizations 8328 Financial corporations other than international organizations 8329 Other nonresidents

9. Copyright 2010, The World Bank Group. All Rights Reserved. 9 GOVERNMENT FINANCE STATISTICS DEBT- RELATED TRANSACTIONS In addition to normal interest and principal transactions regarding debt liabilities, government units may undertake a range of complex debt- related transactions, namely: - assuming debt of other units, - making payments on behalf of other units, - rescheduling debt, - debt forgiveness, - debt defeasance, and - financial leasing.

10. Copyright 2010, The World Bank Group. All Rights Reserved. 10 GOVERNMENT FINANCE STATISTICS INTEREST, PRINCIPAL, AND ARREARS The most common debt transactions of general government units are interest expense and the repayment of principal. Interest accruing on deposits and loans may have to follow national practices and be classified under accounts payable/receivable rather than additional amounts of deposits and loans. If the debtor does not make a payment on or before its scheduled date, a payment arrear is created.

11. Copyright 2010, The World Bank Group. All Rights Reserved. 11 GOVERNMENT FINANCE STATISTICS DEBT ASSUMPTION Debt assumption takes place when the creditor invokes the contract conditions under a debt guarantee. When a general government unit assumes a debt, it may or may not acquire a claim against the original debtor.

12. Copyright 2010, The World Bank Group. All Rights Reserved. 12 GOVERNMENT FINANCE STATISTICS DEBT ASSUMPTION CONDITIONS If the general government unit does not acquire an effective claim on the original debtor, the recording depends on: - If the original debtor is a public corporation owned or controlled by the assuming general government unit and the corporation continues to be a going concern, - If the original debtor is bankrupt, no longer a going concern, or is not a unit owned or controlled by the assuming general government unit,

13. Copyright 2010, The World Bank Group. All Rights Reserved. 13 GOVERNMENT FINANCE STATISTICS DEBT PAYMENTS ON BEHALF OF OTHER UNITS General government units may make one or more debt-service payments on behalf of other units, without assuming the debt. The treatment of these payments depends on: - whether the general government unit acquires an effective financial claim on the debtor, - if there is no claim, it depends on the nature of the unit.

14. Copyright 2010, The World Bank Group. All Rights Reserved. 14 GOVERNMENT FINANCE STATISTICS DEBT FORGIVENESS Debt forgiveness is the cancellation of a debt by mutual agreement between a creditor and debtor. The treatment depends on whether the other party is: - foreign government or another general government unit, - any other type of unit.

15. Copyright 2010, The World Bank Group. All Rights Reserved. 15 GOVERNMENT FINANCE STATISTICS DEBT RESTRUCTURING AND RESCHEDULING General government units may agree in a bilateral arrangement to alter the terms for servicing an existing debt. Any debt forgiven is accounted for as a capital transfer.

16. Copyright 2010, The World Bank Group. All Rights Reserved. 16 GOVERNMENT FINANCE STATISTICS DEBT WRITE-OFFS AND WRITE-DOWNS General government units that are creditors may write off financial assets without an agreement with the debtor. Loans that have become marketable in secondary markets should be reclassified as securities other than shares and valued at market prices.

17. Copyright 2010, The World Bank Group. All Rights Reserved. 17 GOVERNMENT FINANCE STATISTICS DEBT EQUITY SWAPS A general government unit acting as a creditor might exchange a debt instrument for shares and other equity issued by the same unit. The recording of this event depends on: - the value of the shares and other equity received by the general government unit, and - whether there has been an agreement to forgive debt.

18. Copyright 2010, The World Bank Group. All Rights Reserved. 18 GOVERNMENT FINANCE STATISTICS FINANCIAL AND OPERATING LEASES A general government unit may be involved in leasing fixed assets, most likely as the lessee, but possibly as the lessor. The lease must be classified as an operating or financial lease.

19. Copyright 2010, The World Bank Group. All Rights Reserved. 19 GOVERNMENT FINANCE STATISTICS OPERATING LEASES Operating leasing is a productive activity that involves renting fixed assets for terms less than the expected service lives of the assets. Operating leasing can be identified by the following characteristics: - the lessor normally maintains a stock of equipment in good working order which can be hired on demand or at short notice, - the equipment may be rented out for varying periods of time, and - the lessor is frequently responsible for the maintenance and repair of the equipment as part of the service provided to the lessee.

20. Copyright 2010, The World Bank Group. All Rights Reserved. 20 GOVERNMENT FINANCE STATISTICS FINANCIAL LEASES Financial leasing is an arrangement for financing acquisitions of fixed assets. The rental payments made each period by the lessee include an interest payment and a principal payment.

21. Copyright 2010, The World Bank Group. All Rights Reserved. 21 GOVERNMENT FINANCE STATISTICS DEFEASANCE Defeasance is a debt-related operation in which a debtor unit removes liabilities from its balance sheet by pairing them with financial assets.