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1993 SNA Update Information - Country comments for issue:
Treatment of index linked debt instruments

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Treatment of index-linked debt instruments
The guidance in the1993 SNA about how transactions relating to index-linked debt instrument is not precise. When the principal is indexed, the redemption value is not known until maturity; as a result, interest flows are not known before maturity. What should be recorded for interest and principal repayment in the period before maturity? Further, for some instruments, the indexation may lead to valuation gains. How should these be recorded?
Debt indexed to a foreign currency
For debt instruments with both principal and coupons indexed to a foreign currency, the currency of account is important for distinguishing transactions from holding gains and losses. These may be different from an assessment made on the basis of the currency of settlement. Does this mean that debt indexed to foreign currency should be treated in the same way as foreign currency debt, that is as if denominated in foreign currency?
Country comments
Number of country comments for selected issue:42
  Date postedSourceComment
 15/09/2006United KingdomTreatment of index-linked debt instruments:
We consider the dual treatments for instruments indexed to broadly based and narrowly based underlyings to be unsatisfactory and would favour a single treatment using the method proposed for use where the index series is potentially volatile. Specifically, given the constraint that interest recognition is to be based on the so called "debtor approach", we consider that interest should be based on the expected yield at the time of issue.
 15/09/2006United KingdomDebt indexed to a foreign currency:
We agree with all the recommendations made by the AEG.
 15/09/2006LatviaAfter deep discussions and expert consultations we basically support the 1993 SNA Update Issues.
 31/07/2006IsraelIndex-linked debt instruments:
The method proposed for index linked debt instruments ensures that the treatment of such instruments is similar to the treatment of un-linked instruments, assuming that the nominal interest on such instruments is set to compensate for capital losses due to inflation.
However, index linked instruments exist in economies with significant inflation, and in such economies, in our opinion the recommendations for treatment of interest under inflation (in chapter 19 in the current SNA) should be used. If expected values are used, only the linkage of interest should be included in interest payments, and not the expected values of linkage to the principal.
Paragraph 19.82 in the current SNA includes the following sentence:
“The element of compensation for inflation should not be considered as a return to capital by the lender and a current cost by the borrower. The System treats these components of explicit or implicit indexation as interest received and paid in the current accounts, and this treatment does not create great difficulties when inflation is low. However, the measurement of these components is essential when inflation is high if one wants to interpret correctly figures such as government disposable income or saving (or government deficit) and the corresponding figures for creditor sectors, etc.”
In our view the SNA should first of all give the conceptually right solution, and then recommend inferior solutions that are implemented due to practical considerations, such as including the compensation for capital losses in the interest flows under low inflation. We also think that countries that are able to implement a conceptually right solution should explicitly be encouraged to do so.
 31/07/2006IsraelDebt instruments linked to foreign currency:
We disagree with treating debt instruments linked to foreign currency differently from debt instruments linked to other indices. The linkage to foreign currency is similar to any other linkage to a price. In economies with inflation there often is a choice between linkage to a general index or to for example the Euro or US$, and the various possibilities are seen as similar to the borrowers or lenders. Changing the treatment of debt instruments linked to foreign currency will seem an inconsistent registration of similar transactions.
We also think that there are important differences between debt denominated in foreign currency and debt linked to foreign currency (the amount of debt denominated in foreign currency for example seems important for policy on foreign currency reserves), so that they should not be put together in one category. The best solution would perhaps be to show debt instruments linked to foreign currencies as a separate category from both index linked debt instruments and from debt denominated in foreign currency.
 23/02/2006South African Reserve Bank Interest on index-linked debt instruments:
We generally support the recommendations of the AEG.
 23/02/2006South African Reserve Bank Debt instruments linked to a foreign currency:
We generally support the recommendations of the AEG.
 27/01/2006Central Bank of El SalvadorDebt instruments linked to a foreign currency:
de acuerdo con la decisión adoptada por el AEG, en cuanto a que debería tratarse como que si estuvieran denominados en la moneda extranjera a la cual están indexados.
 17/01/2006Central Bank of ChileInterest on index-linked debt instruments:
En Chile la mayor parte de los instrumentos de deuda son indexados (reajustables) o tiene algún factor de reajustabilidad asociado, el tratamiento de los reajustes consiste en considerarlos como reconciliación precio, acogiendo las recomendaciones del SCN 93 Capitulo XIX Anexo B, en que diferencia el interés nominal del interés básico según los efectos de la inflación en el principal, recomendando dejar entre las reconciliaciones la diferencia entre ambos intereses.
Dado que en Chile la indexación está incorporada explícitamente en los contratos y en los estados financieros de las instituciones financieras constituye una partida importante, no se presentan mayores dificultades en la aplicación de la recomendación del SCN 93 mencionada.
 22/12/2005Serbia and MontenegroInterest on index-linked debt instruments:
We agree with the suggested changes.
 22/12/2005Serbia and MontenegroDebt instruments linked to a foreign currency:
We agree with the suggested changes.
 14/12/2005FranceInterest on index-linked debt instruments:
L'INSEE soutient ces recommandations (en particulier le traitement dual, suivant que l'index sur lequel est émis la dette est volatif ou non).
 14/12/2005FranceDebt instruments linked to a foreign currency:
L'INSEE soutient ces recommandations (en particulier le traitement dual, suivant que l'index sur lequel est émis la dette est volatif ou non).
 13/12/2005CanadaInterest on index-link debt instruments:
Canada agrees with BOPCOM that the status quo should be preserved since the debtor approach has been maintained as a valuation principle.
 13/12/2005CanadaDebt instrument linked to foreign currency:
Canada agrees with the recommendation to classify debt instruments indexed to a foreign currency as denominated in a foreign currency and to keep settlement currency separate from the currency of account.
 12/12/2005Bank of KoreaInterest on index-linked debt instrument:
We agree with the recommendation of AEG. We think that alternative 1 and alternative 2 can be chosen as the measurement of interest on index-linked debt instrument according to circumstances.
 12/12/2005Bank of KoreaDebt instrument indexed to a foreign currency:
We agree with the recommendation of AEG. We think that debt instruments with both principal and coupons indexed to a foreign currency should be classified and treated as being denominated in that of foreign currency. The currency of account and currency of settlement should be clearly distinguished in the new manual.
 09/12/2005RussiaInterest onindex-linked debt instruments:
Rosstat largely supports the recommendations on the updating 1993 SNA, made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 09/12/2005RussiaDebt instruments linked to a foreign currency:
Rosstat largely supports the recommendations on the updating 1993 SNA, made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 06/12/2005Central Bank of NorwayDebt instrument linked to a foreign currency:
The Central Bank of Norway agrees with the AEG recommendations. Disregarding the linkage to a foreign currency would distort the data for both foreign exchange exposure and revaluation.
 06/12/2005Central Bank of NorwayInterest on indexed-linked debt instruments:
We suggest that the present 1993 SNA treatment should be kept even if it may result in negative values of interest in some cases. This is the most practical alternative and we cannot see that the other alternatives are satisfactory. The “1993 SNA with revisions” alternatives both involve large amounts of backward revision work. “The modified debtor approach” alternative requires well established markets with detailed term structure for the variable underlying the index in order to observe the expectations. This may be easier to obtain for financial instruments, but difficult for commodities.
 05/12/2005DenmarkInterest on index-linked debt instruments
Agreement
Practically recommendations on how to calculate expected redemption values should be provided – what reference rate should be used.
 02/12/2005NetherlandsInterest onindex-linked debt instruments:
We generally support the recommendations of the AEG.
 02/12/2005NetherlandsDebt instruments linked to a foreign currency:
We generally support the recommendations of the AEG.
 02/12/2005AustraliaInterest on index-linked debt instruments:
Australia believes that this issue is proving intractable as it is not possible to deal with such complex cases using the debtor approach to interest accrual. That said, given the decision to adopt a debtor approach we agree with the decision of the AEG, recognising that the adoption of (c) in certain circumstances represents a change to the SNA
 02/12/2005AustraliaDebt instruments linked to a foreign currency:
Australia agrees with the AEG recommendations.
However, the purpose of distinguishing the currency account and currency of settlement as in (b) is not clear.
 02/12/2005TurkeyInterest on index-linked debt instruments:
We agree with the recommendations made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 02/12/2005TurkeyDebt instruments linked to a foreign currency:
We agree with the recommendations made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 01/12/2005National Bank of MoldovaDebt instruments linked to a foreign currency:
In our opinion the debt instruments with both principal and coupons indexed to a foreign currency should be treated as though they are denominated in that foreign currency.
 01/12/2005United KingdomInterest on index-linked debt instruments:
We agree with the AEG's pragmatic conclusion on this issue. UK experts also have divided views but we are able to accept the AEG compromise.
 01/12/2005United KingdomDebt instruments linked to a foreign currency:
We agree with the AEG and BOPCOM conclusions.
 30/11/2005Slovak RepublicSO SR give support to AEG recommendation related to ongoing effort for clarification of issue.
 30/11/2005ItalyInterest onindex-linked debt instruments:
Istat fully agrees with the recommendations made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 30/11/2005ItalyDebt instruments linked to a foreign currency:
Istat fully agrees with the recommendations made at the July 2005 meeting of the Advisory Expert Group on National Accounts.
 30/11/2005State Bank of PakistanInterest onindex-linked debt instruments:
We have gone through recommendations made by Advisory Expert Group (AEG) and fully agree with them.
 30/11/2005State Bank of PakistanDebt instruments linked to a foreign currency:
We have gone through recommendations made by Advisory Expert Group (AEG) and fully agree with them.
 29/11/2005National Bank of KazakhstanDebt instruments linked to a foreign currency:
We suppose that method of reflecting of debt instruments indexed to foreign currency as debt instruments denominated in foreign currency is more acceptable.
 29/11/2005People's Bank of ChinaInterest on index-linked debt instruments:
I agree with your improvements and have no other suggestions.
 29/11/2005People's Bank of ChinaDebt instruments linked to a foreign currency:
I agree with your improvements and have no other suggestions.
 21/11/2005USADebt instruments linked to a foreign currency:
We agree with the recommendations of the AEG.
 21/11/2005USAInterest on index-linked debt instruments:
We agree with the recommendations of the AEG.
 09/05/2005AustraliaNo AEG decision made. However, it is noted that the AEG "agreed that if a guarantee were to remain a contingent liability off the balance sheet, flows arising from its activation would be recorded as a capital transfer rather than being recorded in the other changes in volume of assets accounts as proposed". BOPTEG recommended that all flows arising from the activation of guarantees should be recorded in the Other Changes in Volume of Assets Account as opposed to recording the flows as transactions (see BOPTEG Outcome Paper #2: Activation of Guarantees). The ABS supports BOPTEG's recommendation.
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