The Balance Sheet 191
liquidity and legal characteristics of the instruments
that describe the underlying creditor-debtor relation-
ships. Th e liquidity of a fi nancial instrument embraces
characteristics such as negotiability, transferability,
marketability, and convertibility.
7.119 Securities are debt and equity instruments
that have the characteristic feature of negotiability. Th at
is, their legal ownership is readily transferred from one
unit to another unit by delivery or endorsement. While
any fi nancial instrument can potentially be traded, se-
curities are designed to be traded, usually on organized
exchanges or “over the counter.” (Th e over-the-counter
market involves parties negotiating directly with one
another, rather than on a public exchange.) Negotiabil-
ity is a matter of the legal form of the instrument. Some
securities may be legally negotiable, but there is not, in
fact, a liquid market where they can be readily bought
or sold. Listed fi nancial derivatives, such as warrants,
are sometimes considered to be securities.
7.120 In addition to classifying fi nancial assets and
liabilities by the characteristics of the fi nancial instru-
ment, they can also be classifi ed according to the resi-
dence of the other party to the instrument (the debtors
for fi nancial assets and the creditors for liabilities).^27
Residence is defi ned in paragraphs 2.6–2.21. Th e clas-
sifi cations of fi nancial assets and liabilities by instru-
ment are shown in Table 7.9.
7.121 Because a given fi nancial instrument creates
both a fi nancial asset and a liability, the same descrip-
tions of instruments can be used for both. For simplic-
ity, the descriptions will refer only to fi nancial assets
unless there is a specifi c need to refer to liabilities.
7.122 As discussed in paragraphs 3.113 and 7.20–
7.25, in principle, all fi nancial assets should be valued
at market value.^28 Because the creditor can dispose of
the asset on the date of the balance sheet at its current
market price, it is that price that is relevant for the bal-
ance sheet. In practice, valuing debt instruments^29 at
market value on the balance sheet date means that:
(^27) A discussion of Islamic banking instruments and how they can
be treated in terms of the classifi cation of fi nancial assets and
liabilities can be found in the MFSM, Appendix 2.
(^28) Th at value, however, may diff er from an asset’s nominal value,
which is a measure of value from the viewpoint of the debtor: at
any moment in time the nominal value is the amount that the
debtor owes to the creditor. See paragraph 3.115.
(^29) All liabilities except equity and investment fund shares, and fi nan-
cial derivatives and employee stock options are debt instruments.
- Debt securities are valued at market prices.
- Insurance, pension, and standardized guarantee
schemes are valued according to principles that
are equivalent to market valuation. - All other debt instruments are valued at nominal
prices, which are considered to be the best gener-
ally available estimates of their market prices.
7.123 Some fi nancial assets and liabilities, most
typically deposits, debt securities, loans, and other
accounts payable/receivable, require the debtor to
pay interest. Th e interest accrues continuously and
increases the total amount that the debtor will be re-
quired to pay (see paragraph 6.64).
7.124 To calculate the overall balance (see para-
graph 4.57) fi nancial assets acquired by government
units in support of their fi scal policies^30 are classifi ed
diff erently from fi nancial assets acquired for liquidity
management. Th e distinction between fi nancial assets
acquired for public policy purposes and fi nancial as-
sets acquired for liquidity purposes is not included in
the GFS classifi cation of fi nancial assets. Th is distinc-
tion rests on the judgment of the analyst of the par-
ticular purpose for employing fi nancial assets.^31
Monetary gold and Special Drawing Rights (SDRs) (6201, 6221, 6301, 6321)
7.125 On the fi nancial assets side, this category
comprises monetary gold and SDRs, and on the li-
abilities side it comprises only SDRs (see paragraph
7.128). Th e counterparties to this fi nancial asset and
liability are nonresidents.Monetary gold (62011, 62211)^32
7.126 Monetary gold is gold to which the mon-
etary authorities (or others who are subject to the ef-
fective control of the monetary authorities) have title
and is held as a reserve asset. It comprises gold bul-
lion (including gold held in allocated gold accounts)(^30) Th is is oft en referred to as “public policy lending” or “policy
lending” and is treated akin to expenditure in the calculation of
the overall balance.
(^31) As explained in Box 6.3, under some circumstances, “capital or
equity injections” are considered to be expense—that is, they do
not result in a fi nancial claim on the debtor.
(^32) Th ere is no liability in the form of monetary gold; the counter-
part liability to monetary gold in the form of unallocated gold
accounts with nonresidents that give title to claim the delivery
of gold is classifi ed under deposits. Gold bullion has no counter-
party liability.