The Balance Sheet 205
by the debtor of the underlying instrument. Like other
fi nancial derivatives, credit derivatives are frequently
drawn up under standard master legal agreements and
involve collateral and margining procedures, which
allow for a means to make a market valuation.
Margins
7.219 Financial derivatives are oft en subject to
margin calls. Margins are payments of cash or de-
posits of collateral that cover actual or potential ob-
ligations incurred. Th e required provision of margin
refl ects market concern over counterparty risk, es-
pecially in markets for futures and exchange-traded
options. Th e classifi cation of margins depends on
whether they are repayable or nonrepayable:
- Repayable margin consists of cash or other col-
lateral deposited to protect counterparties against
default risk. Ownership of the margin remains
with the unit that deposited it. Repayable margin
payments in cash are classifi ed as transactions
and stock positions in deposits (particularly if the
debtor’s liabilities are included in broad money)
or in other accounts receivable/payable. When a
repayable margin deposit is made in an asset other
than cash (such as securities), no transaction nor
change in stock position is recorded because no
change in economic ownership has occurred. - Nonrepayable margin payments reduce the fi nan-
cial liability position in a derivative. In organized
exchanges, nonrepayable margin (sometimes
known as variation margin) is paid daily to meet
liabilities recorded as a consequence of the daily
marking of derivatives to market value. Th e en-
tity that pays nonrepayable margin no longer re-
tains ownership of the margin nor has the right
to the risks and rewards of ownership. Nonrepay-
able margin payments are classifi ed as transac-
tions in fi nancial derivatives.
7.220 Th ese principles for the classifi cation of mar-
gins also apply more generally to margin calls relating
to positions in other fi nancial assets.
Employee stock options (62072, 62172, 62272, 63072, 63172, 63272)
7.221 Employee stock options are options to buy
the equity of a company, off ered to employees of the
company as a form of remuneration. Employee stock
options have similar pricing behavior to fi nancial de-
rivatives, but they have a diff erent nature—including
arrangements for the granting and vesting dates—and
purpose (i.e., to motivate employees to contribute to
increasing the value of the company, rather than to
trade risk). If a stock option granted to employees can
be traded on fi nancial markets without restriction, it
is classifi ed as a fi nancial derivative.
7.222 In some cases, stock options may be provided
to suppliers of goods and services to the enterprise.
Although these are not employees of the enterprise,
for convenience they are also recorded under em-
ployee stock options because their nature and moti-
vation is similar. (Whereas the corresponding entry
for stock options granted to employees is wages and
salaries in kind (2112) as discussed in paragraph 6.17,
the corresponding entry for stock options granted to
suppliers is use of goods and services (22).)
7.223 Employee stock options should be valued
at fair value at grant date^62 using a market value of
equivalent traded options (if available) or using an
option pricing model (binomial or Black-Scholes)
with suitable allowance for particular features of the
options.^63 Aft er the vesting date, employee stock op-
tions are valued at market prices.Other accounts receivable/payable (6208, 6218, 6228, 6308, 6318, 6328)
7.224 Other accounts receivable/payable consist
of trade credit and advances and miscellaneous other
items due to be paid or received. If an economic event
requires a subsequent cash fl ow, for example, goods
and services are sold on credit provided by the sup-
plier and the length of time between the economic
event and the time of the cash fl ow is bridged by an
entry in other accounts receivable/payable.
7.225 Trade credit and advances (62081, 62181,
62281, 63081, 63181, 63281) include (i) trade credit
extended directly to purchasers of goods and services
and (ii) advances for work that is in progress or to be
undertaken, such as progress payments made during(^62) Th e terms grant date, vesting date, and exercise date are defi ned
in paragraph 9.77.
(^63) Th e International Accounting Standards Board provides detailed
recommendations on how employee stock options may be valued,
and its recommendations are likely to be followed by corpora-
tions using employee stock options as a form of compensation for
their employees. Th e value of the employee stock options varies
between grant date and vesting date and then between the vesting
date and exercise date, as the value of the shares covered changes.