Part B - Holding gains and losses (revaluations)
Holding gains and losses (sometimes referred to as revaluations in GFS) are defined as changes in the current market value of an asset or liability resulting from changes in the level and structure of prices, assuming that the asset or liability has not changed qualitatively or quantitatively. Paragraph 10.1 of the IMF GFSM 2014 notes that holding gains or losses can apply to almost all assets or liabilities in GFS, and in the case of assets and liabilities expressed in a foreign currency, includes gains and losses resulting from changes in exchange rates. Capital gains and losses made on the sale of assets (other than inventories) are recorded as holding gains and losses in GFS, and not as revenues.
Paragraph 10.1 of the IMF GFSM 2014 further notes that in GFS, holding gains or losses affects net worth, and the words gain and loss are used in reference to the direction of the change in net worth. A flow that increases the value of an asset or decreases the value of a liability will increase net worth and is referred to as a holding gain. A flow that decreases the value of an asset or increases the value of a liability will decrease net worth and is referred to as a holding loss. Due to the counterparty relationship between financial assets and liabilities in GFS (see paragraph 8.10 of this manual), any references to financial assets in this chapter can also be assumed to refer to liabilities. The basis for valuing flows and stocks is the current market value. Therefore, changes in the current market values of stocks are recorded as holding gains or losses, whether the holding gain or loss is realised or not.
Paragraph 10.5 of the IMF GFSM 2014 specifies that it does not matter whether an asset is held for the entire reporting period; acquired during the reporting period and held until the end of the reporting period; held at the beginning of the reporting period and disposed of during the reporting period; or acquired and disposed of within the same reporting period. In each case, a holding gain or loss is possible and must be recorded for the value of the entire difference between the value of the asset or liability in the opening balance sheet date (or at the time of acquisition of an asset or liability during the reporting period) and the value of the asset or liability at the closing balance sheet date (or at the time of disposal of an asset during the reporting period).
Holding gains and losses may be described as realised or unrealised in GFS. Paragraph 10.6 of the IMF GFSM 2014 defines a realised holding gain (or loss) as occurring when an asset is sold, redeemed, used or otherwise disposed of, or when a liability incorporating a holding gain (or loss) is repaid during the reporting period. The value of transactions in assets or liabilities include the value of realised holding gains or losses. An unrealised holding gain (or loss) is one that is accruing on an asset which is still owned or held, or a liability that is still outstanding at the end of the reporting period. The values of assets and liabilities held at the closing balance sheet date will indicate the presence of any unrealised holding gains or losses when compared with the same values at the opening balance sheet date.
Holding gains and losses are further defined as neutral holding gains and losses and real holding gains in GFS. Paragraph 10.11 of the IMF GFSM 2014 indicates that a neutral holding gain or loss is the value of a holding gain or loss that would accrue if the price of the asset (or liability) changed in the same proportion as the general price level. It is the value needed to preserve the real value of the asset. A real holding gain is the value accruing to an asset as a result of a change in its price relative to the prices of goods and services in general. An increase in the relative price of an asset leads to a positive real holding gain and a decrease in the relative price of an asset leads to a negative real holding gain.
Holding gains and losses do not include changes in the value of assets or liabilities resulting from changes in the quantity or quality of the asset or liability. Any changes to the quality or quantity of an asset or liability is recorded as other changes in the volume of assets and liabilities. Changes in the value of nonfinancial assets due to normal wear and tear in the process of production are recorded as depreciation of non-financial produced assets and not as holding gains or losses. Paragraph 10.8 of the IMF GFSM 2014 notes in particular:
- The decline in the value of non-financial produced assets due to physical deterioration and normal rates of obsolescence is recorded as depreciation of fixed produced assets (non-defence) (ETF 1241, TALC, COFOG-A), or depreciation of fixed produced assets (defence) (ETF 1242, TALC, COFOG-A), and is not a holding loss.
- Debt securities (such as bills or bonds) issued at a discount may increase in value progressively prior to redemption because of the accrual of interest. In GFS, this interest is recorded as interest income (ETF 1131, SDC) and is not a holding gain.