Part D - Valuation of assets and liabilities
All assets and liabilities should be valued as if they were acquired in current market transactions on the balance sheet reporting date (reference date). Paragraph 7.20 of the IMF GFSM 2014 states that the value of an asset (or liability) at any given time is its current market value, which is defined as the amount that would have to be paid to acquire the asset on the reporting date, taking into account its age, condition, and other relevant factors. This amount depends on the economic benefits that the owner of the asset can derive by holding or using it. The remaining benefits expected to be received from most assets diminish with the passage of time through depreciation / amortisation, which reduces the value of the asset. However, the remaining benefits of some assets (such as valuables), may increase or appreciate with the passage of time. The value of the remaining benefits may also increase or decrease because of changes in economic conditions.
If the market value of assets or liabilities increase or decrease during the financial reporting period, then holding gains and losses on the value of the assets or liabilities are recorded in GFS as other economic flows. Holding gains and losses are further discussed in Chapter 11 of this manual.
If the volume of non-financial assets increases through the addition of assets not previously recognised on the GFS balance sheet (such as the discovery of a mineral deposit), or decreases through destruction or depletion of the assets (such as through fire, flood, or other damage), then an other change in the volume of assets entry is recorded in the GFS accounts as other changes in volume of non-financial assets (ETF 5212, TALC). Similarly, if the volume of liabilities increase through situations such as the unilateral write off of debt by government as part of a bail out or other operation, then this is recorded as other change in the volume of liabilities (ETF 5213, TALC). However, if the volume of liabilities increase or decrease due to debt forgiveness or debt rescheduling, these are recorded as transactions in liabilities (ETF 3211, TALC, SDC) due to the mutually agreed nature of the transaction and not as an other volume change. Debt forgiveness and debt rescheduling are discussed in Chapter 13 Part B of this manual. Other changes in the volume of assets are further discussed in Chapter 11 of this manual.
Paragraph 7.24 of the IMF GFS 2014 recommends that observable market prices be used to value all assets and liabilities in the GFS balance sheet. However, in estimating the current market price for balance sheet valuation, a price averaged over all transactions in a market can be used if the market is one on which the items in question are regularly, actively and freely traded. Where there are no observable prices because the assets or liabilities in question have not been purchased or sold on the market in the recent past, then an attempt should be made to estimate what the prices would be, were the assets or liabilities to be acquired on the market on the date to which the balance sheet relates. Such estimates may be obtained by (i) accumulating and revaluing transactions, or (ii) calculating the present value of future returns.
The Australian GFS valuation of financial assets and liabilities
In the Australian macroeconomic statistics, the value of an acquisition or disposal of an existing financial asset or liability is its current market value under the creditor approach (or from the perspective of the unit holding the security). Paragraph 17.261 of the 2008 SNA states that the creditor approach uses the current rate to estimate the value of interest between any two points in the instrument’s life. Market value is conceptually equal to the required future payments of principal and contractual interest discounted at the existing market yield. The current IMF GFSM 2014 no longer recognises the use of the creditor approach, and only refers to it indirectly in paragraph 6.66. The Australian GFS diverges from the IMF GFSM 2014 in the valuation of all government assets and liabilities at the current market value using the creditor approach. The creditor approach is further discussed in Chapter 13 Part B of this manual.
The international valuation of financial assets and liabilities
The 2008 SNA and the IMF GFSM 2014 value their financial assets and liabilities using the nominal value under the debtor approach. The nominal value is conceptually equal to the required future payments of principal and interest discounted at the contractual interest rate. The debtor approach assumes that interest payments are fixed in advance, and accrued interest is determined using the original yield-tomaturity which is established at the time of the security issuance.
The difference between the nominal value and the market value
The essential difference between nominal and market valuation is the use of the current market yield instead of the contractual rate(s) as the discount rate(s) applicable. The relevance of historical (contractual) interest rates to reflect current valuation is not supported by the ABS. The market valuation principle using the creditor approach (from the perspective of the unit holding the security) reflects the current market value of assets and liabilities, and is a fundamental principle across ABS economic statistics. It should be noted that for consistency, valuation of debt at current market values requires measurement of interest payments and receipts at the current market yield, not contractual rates. The market value is further discussed in Chapter 13 Part B of this manual.
Debt data will be sought at market value, but if only available on a nominal value basis the ABS will work with providers to find a suitable solution which may entail modelling to estimate the market value using the data which is available.
Estimating current market prices
Paragraphs 8.34 to 8.40 below provide general descriptions of methods used to estimate current market prices, and are extracted from paragraphs 7.26 to 7.33 of the IMF GFSM 2014. Because the valuation of liabilities in GFS is the same as the valuation of their corresponding financial assets, references to financial assets in this chapter should be read as including liabilities as well.
Values observed in markets
The ideal source of price observations for valuing balance sheet items is a market (like the stock exchange), in which each asset traded is completely homogeneous, is often traded in considerable volume, and has its market price listed at regular intervals. Such markets yield data on prices that can be multiplied by indicators of quantity in order to compute the total market value of different classes of assets held by sectors and of different classes of their liabilities.
For securities quoted on a stock exchange, it is feasible to gather the prices of individual assets and broad classes of assets of all existing securities. The global valuation of existing securities may also be determined to assist in valuation of the assets. Debt securities traded (or tradeable) in organised and other financial markets (such as bills, bonds, debentures, negotiable certificates of deposit, asset-backed securities, etc.) should be valued at the current market value. The treatment of debt in GFS is further discussed in Chapter 13 Part B of this manual.
If assets of the same kind are being produced and sold on the market, an existing asset may be valued at the current market price of a newly produced asset adjusted for depreciation in the case of non-financial produced assets, and any other differences between the existing asset and a newly produced asset. This adjustment for depreciation should be calculated on the basis of the asset prices prevailing on the balance sheet reference date rather than the actual amounts previously recorded as an expense.
In addition to providing direct observations on the prices of assets actually traded there, information from such markets may also be used to price similar assets that are not traded. For example, information from the stock exchange also may be used to price unlisted shares by analogy with similar, listed shares, making some allowance for the inferior marketability of the unlisted shares. Similarly, appraisals of assets for insurance or other purposes generally are based on observed prices for items that are close substitutes, although not identical, and this approach can be used for balance sheet valuation.
Values obtained by accumulating and revaluing transactions
In the absence of observable market prices, the balance sheet value of an asset may be obtained by accumulating and revaluing transactions. The values of most non-financial assets change year by year reflecting changes in market prices. At the same time, initial acquisition costs are reduced by depreciation (in the case of non-financial produced assets), or amortisation, or depletion over the expected life of the asset. The value of such an asset at a specific point in its life is given by the current acquisition price of an equivalent new asset minus the depreciation, amortisation, or depletion imputed by applying the chosen pattern of decline to that price. This valuation is referred to as the written-down replacement cost. When directly observed prices for used assets are not available, this procedure gives a reasonable approximation of what the market price would be, were the asset to be offered for sale.
- In the absence of observed market values, most non-financial produced assets are recorded in the balance sheet at their written-down replacement cost.
- Intangible non-produced assets (such as goodwill and marketing assets), are typically valued at their initial acquisition costs (using observed prices or the historical value revalued to the current period price using an appropriate price index) minus an allowance for amortisation. For this method, a pattern of decline must be chosen, which may be based on tax laws and accounting conventions.
- It may be possible to value subsoil and other naturally occurring assets at their initial acquisition costs (using observed prices or the historical value revalued to the current period price using an appropriate price index) minus an allowance for depletion.
The perpetual inventory method (PIM) is commonly used to estimate the written-down replacement cost of a category of assets, especially tangible non-financial produced assets. Under this method, the value of the stock is based on estimates of acquisitions and disposals that have been accumulated (after deduction of the accumulated depreciation, amortisation, or depletion imputed by applying the chosen pattern of decline to that price), and revalued over a long enough period to cover the acquisition of all assets in the category. The PIM may be viewed as the macroeconomic equivalent of an asset register, with the difference being that the PIM calculates the written-down replacement cost for large groups of assets, while an asset register does them for individual assets or asset types.
Present value of future returns
In some cases, current market prices may be approximated by the present value of the future economic benefits expected from a given asset. The present value is the value today of a future payment or stream of payments discounted at some appropriate compounded interest rate. It is also referred to as the time value of money or discounted cash flow. This method may be feasible for a number of assets such as naturally occurring assets and intangible assets. For example, timber and subsoil assets are assets whose benefits are normally receivable well in the future and / or spread over several years. Current prices can be used to estimate the gross return from the disposal of these assets and the costs of bringing them to market. These returns and costs can then be discounted to estimate the present value of the expected benefits.
Costs of ownership transfer
The current market value of non-financial assets (except land but including all other tangible non-produced assets) includes all costs of ownership transfer to the extent they have not been expensed as depreciation. The costs of ownership transfer on land are not included in the value of the land itself, but are included as part of the value of land improvements (TALC 113). The reason for this is because the costs of ownership transfer relate to the items that are built on the surface of the land (these are produced assets and therefore seen as improvements to the land) rather than the land itself (which is treated as a non-produced asset in GFS). Land only includes the ground, including the soil covering and any associated surface waters, over which ownership rights are enforced. Therefore, there are no costs of ownership transfer shown separately in the GFS balance sheet.
Paragraph 8.8 of the IMF GFSM 2014 indicates that costs of ownership transfer are attributed to the purchaser or seller of the asset according to which unit bears the responsibility of meeting the costs in the purchase / sale agreement. Examples of costs of ownership transfer include fees paid to surveyors, engineers, architects, lawyers, estate agents, trade and transport costs separately invoiced to the purchaser, and taxes payable on the transfer. Paragraph 6.60 of the IMF GFSM 2014 notes that costs of ownership transfer are estimated at the time of the acquisition of an asset and are written off through depreciation over the period the asset is expected to be held by the purchaser rather than over the whole life of the asset.
Also included as part of costs of ownership transfer are terminal costs (also known as decommissioning or make-good costs). These are estimated at the time of the acquisition of the asset by the owner, but differ to other costs of ownership transfer because they are written off over the life of the associated asset, regardless of the number of owners during the life of the asset. Paragraph 6.60 of the IMF GFSM 2014 notes that in the case of large assets, such as oil rigs and nuclear power stations, there may be large terminal costs associated with the decommissioning of the assets at the end of their productive life. For some land sites, such as those used for landfill, there may be large terminal costs associated with rehabilitation of the site.
The costs of ownership transfer on financial assets are excluded from the current market value of the financial assets themselves. Counterpart financial assets and liabilities refer to the same financial instrument and so debtors and creditors record the same value. Therefore, the costs associated with the acquisition of a financial asset are treated as use of goods and services (ETF 1233, COFOG-A, SDC) at the time the financial asset is acquired. Costs of ownership transfer and decommissioning costs are also excluded on inventories and military inventories. The reason for this is because inventories are held for specific use by producer units for use in the production of goods or services.
Financial assets and liabilities in foreign currency
The value of financial assets and liabilities denominated in foreign currencies should be converted to the domestic currency value at the market exchange rate prevailing on the date to which the balance sheet relates. Paragraph 3.119 of the IMF GFSM 2014 recommends that the rate used is the mid-point between the buying and selling spot rates for currency transactions. When a multiple exchange rate system is in operation, the valuation should be based on the rate applicable to the type of asset in question.
If a transaction expressed in a foreign currency involves the creation of a financial asset or liability, such as other accounts receivable / payable, and is followed by a second transaction in the same foreign currency that extinguishes the financial asset or liability, then both transactions are valued at the exchange rates effective when each takes place.