252 Government Finance Statistics Manual 2014
scheme when there is a change in the value of the li-
ability because of a change in the interest rate used
to discount the future benefi ts. Th e liability should be
reviewed periodically and revalued as necessary for
changes in market interest rates.
10.38 At fi rst sight, it would seem that there are no
other economic fl ows involved for a defi ned-benefi t
pension scheme since the two components recorded
as the pension contributions and property expense
for investment income disbursements are matched
by equal-value increases in entitlements. However,
because the nature of a defi ned-benefi t pension
scheme is that the level of benefi t entitlements is de-
termined by a formula, there are other factors that
may intervene to aff ect changes in the level of entitle-
ments. Th ese factors include a price escalation clause,
changes in the formula used to determine benefi ts,
and demographic assumptions about lifespan.
10.39 Th e factors that change the level of entitle-
ments (i.e., changes in the formula used to determine
the benefi ts and demographic assumptions) should
be recorded as other changes in the volume of assets
(see paragraph 10.73); the adjustments from changes
in the price escalation formula are recorded as hold-
ing gains or losses.
10.40 Th e impact of promotions, merit increases,
and other real salary increases on entitlements is a
special case.^10 Many defi ned-benefi t pension schemes
use a formula to set benefi ts based on either the fi nal
salary or average salary as a key determinant. Th ere-
fore, this implies that any promotion or other real
increase in salaries means that the total pension en-
titlements accrued to date are increased to take ac-
count of the new salary level. Th is is a signifi cant
benefi t for the individual and has consequences for
the employer’s pension liabilities. It is recommended
that a simple and adequate solution would be to treat
the impact of promotions for the unit as a whole as a
price change and record this change as a holding gain.
If the projected benefi t obligation method is used to
value pension entitlements, an adjustment in the form
of other changes in the volume of assets is needed if
the enterprise makes a structural change in the way
promotions and merit increases are awarded (see
paragraph 10.72).(^10) Also see the 2008 SNA, paragraphs 17.180–17.186.
10.41 An equal-valued holding gain should be
recorded with respect to the liability for a defi ned-
contribution pension scheme whenever a holding gain
is recorded with respect to the assets of the fund. Th e
investment of accumulated pension entitlements of a
defi ned-contribution pension scheme leads to hold-
ing gains (and possibly losses). Th ese come about
through the management of investment in assets held
by the fund. Th e holding gains appear under entries
for the relevant assets for the pension fund, with a
matching entry for the increase in the liability of the
pension fund toward the policyholders (households).
Financial derivatives and employee stock options (4207, 4217, 4227, 4307, 4317, 4327).
10.42 Financial derivatives have quoted prices or
have prices that can be derived from the underlying
item that is the subject of the derivative. Th us, fi nan-
cial derivatives register holding gains and losses.
10.43 Employee stock options can also register
holding gains and losses. In principle, any change in
value between the grant date and vesting date should
be recorded as compensation of employees, while any
change in the value between vesting date and exercise
date is treated as a holding gain or loss. In practice,
and for pragmatic reasons, the whole of the increase
between grant date and exercise date is treated as a
holding gain or loss (see paragraph 9.80). An increase
in value of the share price above the strike price is a
holding loss for the employer.Financial assets denominated in foreign currencies
10.44 Th e value of a fi nancial asset denominated in
a foreign currency is its current value in the foreign
currency converted into the domestic currency at the
current exchange rate. Th erefore, holding gains may
occur not only because the price of the asset in the
foreign currency changes but also because exchange
rates change.Debt instruments that do not accrue interest
10.45 Th ere may be an unusually long time^11 be-
fore payment is due on an outstanding debt liability(^11) What constitutes an unusually long time in this context will
depend on the circumstances. For example, for any given time pe-
riod, the higher the level of interest rates or the longer the delay in
payment, the greater is the opportunity cost of delayed payment.