Liabilities in arrears and related charges (ETF 712)
Arrears are defined as amounts that are both unpaid and past the due date for payment. Paragraph 9.20 of the IMF GFSM 2014 indicates that amounts payable for any expense, acquisition of non-financial assets, or related to any liability may become in arrears if the amounts due are past payment. Only the amounts past due are classified as arrears in GFS. For example, in the case of overdue debt service payments, only the overdue part is considered to be in arrears.
Paragraph 9.21 of the IMF GFSM 2014 states that some types of financial assets and liabilities (most notably debt securities, loans, financial derivatives, and accounts receivable / payable), mature at a scheduled date (or series of dates) when the debtor is required to make specified payments to the creditor. If the payments are not made as scheduled, the debtor is seen to be effectively changing the terms of the debt contract (and sometimes even the classification) of a financial instrument. In this situation, the debtor is viewed as having effectively obtained additional financing by not making the scheduled payments.
In the ABS GFS, liabilities in arrears and related charges (ETF 712) are further classified as:
- Total arrears (ETF 7121); and
- Interest on arrears (ETF 7122).
Total arrears (ETF 7121)
Total arrears (ETF 7121) records the total sum of amounts that are both unpaid and past the due date for payment (also known as arrears) during the reference period. The value of total arrears should be recorded at the current market value of the arrears. When arrears occur, paragraph 9.21 of the IMF GFSM 2014 recommends that no transaction should be imputed, but the arrears should continue to be shown in the same instrument until the liability is extinguished and the details of the total amount of arrears should be recorded as a memorandum item to the GFS balance sheet under total arrears (ETF 7121). However, if the contract of a financial instrument provides for a change in the characteristics of a financial instrument should it go into arrears, then this change should be recorded as a reclassification via an other changes in the volume of the financial assets (ETF 5211, TALC) or other changes in the volume of liabilities (ETF 5213, TALC) account entry. See Chapter 11 of this manual for further information on other changes in the volume of assets and liabilities. If the contract of the financial instrument is renegotiated, or the nature of the instrument changes from one category to another (for example, from bonds to equity), then a new transaction is recorded in GFS accounts. It will involve recording the redemption of the financial instrument in arrears and the issuance of a new instrument.
Interest on arrears (ETF 7122)
Interest on arrears (ETF 7122) records any interest that accrues on arrears during the reporting period. Interest can accrue on liabilities in arrears (both principal and interest arrears) and is known as late interest in paragraph 9.22 of the IMF GFSM 2014. Late interest accrues at the same interest rate as on the original debt instrument, unless the interest rate for arrears was stipulated in the original debt contract, in which case the stipulated interest rate should be used. The stipulated rate may include a penalty rate in addition to the interest rate on the original debt. For other liabilities in arrears (in the absence of other information), interest costs accrue on these arrears at the market rate of interest for overnight borrowing.
Paragraph 9.22 of the IMF GFSM 2014 recommends that any additional charges relating to arrears (such as penalties) be classified as interest on arrears (ETF 7122) as a memorandum item to the GFS balance sheet at the time that the charges accrue. If an item is purchased on credit and the debtor fails to pay within the period stated at the time the purchase was made, any extra charges incurred should also be classified as interest on arrears (ETF 7122) as a memorandum item to the GFS balance sheet until the debt is extinguished.
Non-performing loans (ETF 713, and ETF 7131)
Non-performing loans (ETF 713, and ETF 7131) are defined in paragraph 7.262 of the IMF GFSM 2014 as loans for which:
- Payments of principal and interest are past due by three months (90 days) or more; or
- Interest payments equal to three months (90 days) interest or more have been capitalised (reinvested to the principal amount) or payment has been delayed by agreement; or
- Evidence exists to reclassify a loan as non-performing even in the absence of a 90-day past due payment, such as when the debtor files for bankruptcy.
Paragraph 7.262 of the IMF GFSM 2014 states that the amount of non-performing debt outstanding remains a legal liability of the debtor and interest should continue to accrue, unless the liability has been extinguished by repayment or as a result of a bilateral arrangement between debtor and creditor.
As mentioned earlier in this chapter, loans are recorded at their current market value in Australian GFS. The current market value is equal to the required future payments of principal and contractual interest discounted at the existing market yield interest rate.