Balance of Payments and International Investment Position Manual - Sixth Edition (BPM6), Appendix 2, January 2010

245

APPENDIX

Debt Reorganization and

Related Transactions

A. Debt Reorganization

Reference:

IMF and others, External Debt Statistics: Guide for Com-

pilers and Users, Chapter 8, Debt Reorganization.

A2.1 This appendix discusses various forms of

debt reorganization and related transactions, and how

they are recorded in the balance of payments and the

international investment position. References are made,

where applicable, to exceptional financing when reor-

ganization may arise to finance balance of payments

needs, and to debt concessionality when reorganization

may involve transfers to account for such concessional-

ity. Table A1.1 in Appendix 1, Exceptional Financing

Transactions, provides a summary presentation of the

recording of debt reorganization in the standard and

analytic presentations of the balance of payments.

A2.2 Debt reorganization (also referred to as debt

restructuring) is defined as arrangements involving

both the creditor and the debtor (and sometimes third

parties) that alter the terms established for servicing an

existing debt. Governments are often involved in debt

reorganization, as a debtor, creditor or guarantor, but

debt reorganization can also involve the private sector,

such as through debt exchanges.

A2.3 Debt reorganization usually involves relief for

the debtor from the original terms and conditions of debt

obligations it has entered into. This may be in response to

liquidity issues, where the debtor does not have the cash

to meet looming debt service payments, or sustainability

issues, where the debtor is unlikely to be able to meet its

debt obligations in the medium term.

A2.4 A failure by a debtor economy to honor its

debt obligations (default, unilateral moratorium, etc.)

is not debt reorganization because it does not involve

an arrangement between the creditor and the debtor.

Such failure gives rise to arrears, which are also cov-

ered in this appendix. Similarly, a creditor can reduce

the value of its debt claims on the debtor in its own

books through debt write-offs—unilateral actions that

arise, for instance, when the creditor regards a claim

as unrecoverable, perhaps because of bankruptcy of

the debtor, and so no longer carries it on its books.

Again, this is not debt reorganization as defined in

the Manual.

A2.5 The four main types of debt reorganization

are:

(a) A reduction in the amount of, or the extinguish-

ing of, a debt obligation by the creditor via a

contractual arrangement with the debtor. This is

debt forgiveness.

(b) A change in the terms and conditions of the amount

owed, which may result, or not, in a reduction

in burden in present value terms.

Depending

on the nature of the transaction undertaken, the

reorganization is described as debt rescheduling

or refinancing (or debt exchange).

thing of economic value, other than another

debt claim, on the same debtor. This includes

debt conversion, such as debt-for-equity swaps,

debt-for-real-estate swaps, debt-for-development

swaps, and debt-for-nature swaps,

and debt pre-

payment (or debt buybacks for cash).

(d) Debt assumption and debt payments on behalf of

others when a third party is also involved.

Also called “time value of money” or “discounted cash flow,”

present value is the value today of a future payment or stream of pay-

ments discounted at some appropriate compounded interest rate.

Some agreements described as debt swaps are equivalent to debt

forgiveness from the creditor and the debtor viewpoint. At the same

time, there is a commitment from the debtor country to undertake a

number of development, environment, etc., expenses. These transac-

tions should be considered under debt forgiveness, because no value

is provided to the creditor.

246

A2.6 A debt reorganization package may involve

more than one of the types mentioned above; for exam-

ple, most debt reorganization packages involving debt

forgiveness also result in a rescheduling of the part of

the debt that is not forgiven or cancelled.

1. Debt forgiveness

a. Definitions

A2.7 “Debt forgiveness” is defined as the voluntary

cancellation of all or part of a debt obligation within

a contractual arrangement between a creditor and a

debtor.

Debt forgiveness is distinguished from debt write-

off by the agreement between the parties and the intention

to convey a benefit, rather than unilateral recognition by

the creditor that the amount is unlikely to be collected.

Debt forgiveness is unlikely to arise between commercial

entities. Debt forgiven may include all or part of the prin-

cipal outstanding, inclusive of any accrued interest arrears

(interest that fell due in the past) and any other interest

costs that have accrued. Debt forgiveness does not arise

from the cancellation of future interest payments that have

not yet fallen due and have not yet accrued.

b. Accounting for debt forgiveness

A2.8 In the balance of payments, debt forgiveness,

as noted in paragraphs A1.5–A1.6, is recorded (at the

time specified in the agreement that the debt forgive-

ness takes effect) in the standard presentation as a

capital transfer receipt of the debtor economy (transfer

payment of the creditor economy), with a repayment of

the debtor’s liability in the financial account (a receipt

in the creditor’s asset). (See Table A1.1, rows 6–11.) In

the IIP, the debtor’s liability and creditor’s asset are

reduced by the amount of debt that is forgiven. As to

the value of the debt forgiveness, market prices are the

basis of valuation for flows and stocks, except for loans

where the nominal value is used.

A2.9 In the analytic presentation, the recording,

or not, of debt forgiveness in exceptional financing

(below-the-line) depends on whether the debt is due

for payment in the current period, in arrears, or not yet

due (Table A1.1, rows 1–6). Forgiveness of obligations

due in the current period is recorded below-the-line

as a credit item under debt forgiveness, whereas the

This includes forgiveness of some or all of the principal amount

of a credit-linked note arising from an event affecting the entity on

which the embedded credit derivative was written, and forgiveness

of principal that arises when a type of event contractually specified

in the debt contract occurs, such as forgiveness in the event of a type

of catastrophe.

reduction of the obligations is shown above-the-line

as a debit item. For forgiveness in arrears from previ-

ous periods, a credit entry under debt forgiveness and

a debit entry under cancellation of arrears are both

recorded below-the-line under exceptional financing.

If the obligations not yet due are forgiven, there are

no entries under exceptional financing; all entries are

above-the-line.

2. Debt rescheduling and refinancing

A2.10 Debt rescheduling and refinancing involve a

change in an existing debt contract and replacement by

a new debt contract, generally with extended debt ser-

vice payments. Debt rescheduling involves rearrange-

ments on the same type of instrument, with the same

principal value and the same creditor as with the old

debt. Refinancing entails a different debt instrument,

generally at different value, and may be with a creditor

different than that from the old debt.

For instance, a

creditor may choose to apply the terms of a Paris Club

agreement either through a debt rescheduling option

(that is, changing the terms and conditions of its exist-

ing claims on the debtor) or through refinancing (mak-

ing a new loan to the debtor that is used to repay the

existing debt).

a. Debt rescheduling

Definition

A2.11 Debt rescheduling is a bilateral arrangement

between the debtor and the creditor that constitutes

a formal deferment of debt service payments and the

application of new and generally extended maturities.

The new terms normally include one or more of the fol-

lowing elements: extending repayment periods, reduc-

tions in the contracted interest rate, adding or extending

grace periods for the repayment of principal, fixing the

exchange rate at favorable levels for foreign currency

debt, and rescheduling the payment of arrears, if any. In

the specific instance of zero coupon securities, a reduc-

tion in the principal amount to be paid at redemption to

an amount that still exceeds the principal amount out-

standing at the time the arrangement becomes effective

could be classified as either an effective change in the

From the debtor perspective, debt refinancing may involve bor-

rowing from a third party to repay a creditor. The definition of

debt refinancing in the Manual is a narrower concept reflecting

transactions between the debtor and same creditor only. The trans-

actions associated with borrowing from a third party for balance

of payments support are set out in Section D, Borrowing for Bal-

ance of Payments Support, of Appendix 1, Exceptional Financing

Transactions.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

247

contractual rate of interest or a reduction in principal

with the contractual rate unchanged. Such a reduction

in the principal payment to be made at maturity should

be recorded as debt forgiveness, or debt rescheduling

if the bilateral agreement explicitly acknowledges a

change in the contractual rate of interest. Under Paris

Club arrangements, rescheduling can be characterized

as “flow” or “stock” rescheduling. A flow reschedul-

ing refers to a rescheduling of specified debt service

falling due during a certain period and, in some cases,

specified arrears outstanding at the beginning of that

period.

A stock rescheduling refers to rescheduling the

outstanding stock of debt at a particular point in time.

Accounting for debt rescheduling

A2.12 The balance of payments treatment for debt

rescheduling is that the existing contract is extin-

guished and a new contract created. The applicable

existing debt is recorded as being repaid and a new debt

instrument (or instruments) created with the new terms

and conditions. In the standard presentation for the

debtor, a debit entry is recorded under the appropriate

instrument representing the repayment of the old debt

with a credit entry under the appropriate instrument

representing the creation of a new debt (Table A1.1,

rows 19–25). This treatment does not apply, however,

to interest arrears that are being rescheduled when the

conditions in the existing debt contract remain intact.

In such a case, the existing debt contract is not consid-

ered to be rescheduled, only the interest arrears. The

IIP reflects the transactions extinguishing the old debt

instrument and creating the new instrument.

A2.13 The transaction is recorded at the time both

parties record the change in terms in their books, and

is valued at the value of the new debt (which, under

a debt rescheduling, is the same value as that of the

old debt). If no precise time is determined, the time at

which the creditor records the change in terms in its

books is decisive. If the rescheduling of obligations due

beyond the current period is linked to the fulfillment of

certain conditions by the time the obligations fall due

(such as multiyear Paris Club rescheduling), entries are

recorded in the balance of payments only in the period

when the specified conditions are met.

A2.14 In the analytic presentation, as noted in

Appendix 1, Exceptional Financing Transactions, the

recording of debt rescheduling transactions in excep-

In the balance of payments, if the debt falling due during the

period is rescheduled, the transaction is treated the same as the

rescheduling of a debt stock.

tional financing depends on whether the debt being

rescheduled is due for payment in the current period,

in arrears, or not yet due. Obligations falling due in the

reporting period are recorded under exceptional financ-

ing (below-the-line as credit entries under the appropri-

ate instruments), with debit entries made above-the-line

under the appropriate debt instruments in the financial

account and the income account (for accrued interest)

(Table A1.1, rows 19–22). For arrears, the two entries

are under exceptional financing, that is, below-the-line,

with credit items (under the relevant instrument) and

debit items (under rescheduling of arrears) (Table A1.1,

rows 23–24). For obligations not yet due, both debit

and credit entries are recorded above-the-line under the

appropriate instruments in the financial account (Table

A1.1, row 25).

b. Debt refinancing

Definition

A2.15 Debt refinancing involves the replacement of

an existing debt instrument or instruments, including

any arrears, with a new debt instrument or instru-

ments. It can involve the exchange of the same type of

debt instrument (loan for a loan) or different types of

debt instruments (loan for a bond). For instance, the

public sector may convert various export credit debts

into a single loan. Also, debt refinancing can be said

to have taken place when a debtor exchanges existing

bonds for new bonds through exchange offers given by

its creditor (rather than a change in terms and condi-

tions). So debt refinancing can occur irrespective of

whether the debtor is experiencing balance of payments

difficulties or not.

Accounting for debt refinancing

A2.16 The balance of payments treatment of debt refi-

nancing transactions is similar to debt rescheduling to the

extent that the debt being refinanced is extinguished and

replaced with a new financial instrument or instruments.

However, unlike in rescheduling, the old debt is extin-

guished at the value of the new debt instrument except for

nonmarketable debt owed to official creditors.

A2.17 If the refinancing involves direct debt

exchange, such as a loan-for-bond swap, in the standard

presentation, debit entries are recorded by the debtor

under the appropriate debt instrument in the financial

account and the income account (for accrued interest)

and a credit entry under portfolio investment liabilities

to show the creation of the new obligation (Table A1.1,

rows 26–30). The transaction is valued at the value of

Appendix 2 g Debt Reorganization and Related Transactions

248

the new debt with the difference between the value of

the old debt and that of the new instrument recorded in

the revaluation account. However, if the debt is owed

to official creditors and is nonmarketable (loan), the

old debt is extinguished at its original value with the

difference in value with the new instrument recorded

as debt forgiveness.

A2.18 Where there is no established market price

for the new bond, an appropriate proxy is used. For

example, if the bond is similar to other bonds being

traded, the market price of a traded bond would be an

appropriate proxy for the value of the new bond. If the

debt being swapped was recently acquired by the credi-

tor, the acquisition price would be an appropriate proxy.

Alternatively, if the interest rate on the new bond is

below the prevailing interest rate, the discounted value

of the bond, using the prevailing interest rate, could

serve as a proxy. If such information is not available,

the face value of the bond being issued may be used as

a proxy. See also debt-for-equity conversion below.

A2.19 The IIP reflects the transactions extinguish-

ing the old debt instrument and creating the new debt

instrument along with any valuation change recorded in

the revaluation account. For instance, a loan-for-bond

exchange undertaken will generally result in a reduc-

tion in the liabilities of the debtor (reduction in the

claim of the creditor on the debtor economy) because

the loan is recorded at nominal value versus the market

value of the bond.

A2.20 In the analytic presentation, debt-for-bond

exchange of obligations falling due in the reporting

period are recorded below-the-line as credit entries

under the appropriate instruments in exceptional financ-

ing, with debit entries made above-the-line under the

appropriate debt instruments in the financial account and

the income account (for accrued interest) (Table A1.1,

rows 26–27). For arrears refinanced, there are offsetting

credit (under the relevant instrument) and debit items

(under rescheduling of arrears) under exceptional financ-

ing. For obligations not yet due, both debit and credit

entries are recorded above-the-line under the appropriate

instruments in the financial account (Table A1.1, row

30). When arrears are cancelled as a result of a debt-for-

debt exchange, the two entries are below-the-line: a debit

entry under cancellation of arrears (under the relevant

debt instrument in the standard presentation) and a credit

item under debt forgiveness (Table A1.1, rows 28–29).

A2.21 If the proceeds of the new debt are used to

partially pay off existing debt, any remaining debt is

recorded as the extinguishment of the old debt and

creation of a new debt, unless it is paid off through a

separate transaction.

A2.22 If the terms of any new borrowings are con-

cessional, the creditor could be seen as providing a

transfer to the debtor. Debt concessionality is discussed

below.

3. Debt conversion and debt prepayment

a. Definitions

A2.23 Debt conversion (swap) is an exchange of

debt—typically at a discount—for a nondebt claim

such as equity, or for counterpart funds that can be

used to finance a particular project or policy. Typically

debt conversion involves an exchange of external debt

in foreign currency for a nondebt obligation in domestic

currency, at a discount. Debt for equity, debt for exports,

debt for nature, and debt for development swaps are all

examples of debt conversion. In essence, external debt

is extinguished and a nondebt liability created.

A2.24 A debt-for-equity swap results in reduced debt

liability and an increase in equity liability of the debtor

economy. A third party, usually a nongovernmental

organization (NGO) or a corporation, is often involved

in a debt-for-equity swap, buying the claims from the

foreign creditor and receiving shares in a corporation or

local currency (to be used for equity investment) from

the debtor economy.

A2.25 Other types of debt swaps, such as exter-

nal debt obligations for exports (debt for exports) or

external debt obligations for counterpart assets that are

provided by the debtor to the creditor for a specified

purpose, such as wildlife protection, health, education,

and environmental conservation (debt for sustainable

development) are also debt conversions.

A2.26 It is important to distinguish direct and indi-

rect debt conversion, that is, whether the swap leads

directly to the acquisition of a nondebt claim on the

debtor, or indirectly via another claim on the economy,

such as a deposit that is subsequently used to purchase

equity.

b. Accounting for debt conversion

A2.27 Where debt is exchanged for another item

(e.g., equity or counterpart funds for development pur-

poses), the transaction is recorded at the time both

parties record the exchange of value in their books.

The general principle is for the old debt to be valued

at the value of the item acquired (converted at the pre-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

249

vailing market exchange rate if the item is in foreign

currency). Any difference between the value of the

debt being extinguished and the corresponding claim

or funds provided is recorded as a valuation adjustment

in the revaluation account. An exception arises when

official creditors are owed nonmarketable debt, and

the counterpart claim (assets) has a lower value than

the debt, in which case the transaction in the old debt

is recorded at its full value and any difference in value

between the debt and counterpart item (or assets) is

recorded as debt forgiveness, a capital transfer. With

debt-for-development swaps, the transactions recorded

should be based on the type of debt obligation forgiven

rather than the subsequent use of the funds.

A2.28 Debt-for-equity and debt-for-development

swaps are the most commonly used debt conversion

arrangements.

c. Debt-for-equity swaps

Direct debt conversion

A2.29 For debt exchanged directly for equity invest-

ment in the debtor economy, credit entries should

be made under direct investment–equity, or portfo-

lio investment–equity. These transactions should be

recorded at the value of the equity acquired, with off-

setting debit entries made under the appropriate debt

instrument for the reduction in liabilities. The treatment

of transactions recorded depends on whether the debt

being swapped is due for payment in the current period,

is in arrears, or is not yet due (Table A1.1, rows 8–11).

Debt due for payment in the current period

A2.30 In the standard presentation, for a debt-for-

equity swap there are debit entries under the relevant

instrument, such as other investment liabilities, and

the income account (for accrued interest) for all pay-

ments falling due in the current period. The value of the

repayment of the old debt is equal to the market value

of the equity liability being swapped, with the contra-

entry credit recorded in direct investment–equity, or

portfolio investment–equity. If the market value of the

new liability is lower than the value of the old debt,

a valuation adjustment is recorded under the relevant

instrument, such as loan liabilities in the revaluation

account (see also paragraph A1.13).

A2.31 In the analytic presentation, the debit entries

are recorded above-the-line and the contra-entry credit

is recorded below-the-line under direct investment or

portfolio investment-equity.

Debt in arrears

A2.32 In the standard presentation, debt-for-equity

swaps for arrears are recorded as a debit entry under

the relevant instrument in the financial account, at

the value of the equity liabilities being provided, with

the contra-entry credit in direct investment–equity or

portfolio investment–equity. In the analytic presenta-

tion, a debit entry is recorded in exceptional financ-

ing under cancellation of arrears, with the offsetting

credit entry also recorded in exceptional financing

under direct investment-equity or portfolio investment-

equity.

Debt due for payment in the future

A2.33 In the standard presentation, debit entries

arising from debt-for-equity swap operations for debt

due for payment in the future and exchanged at a price

below nominal value are recorded as a debit entry in the

respective accounts at the value of the equity liabilities

being provided with the contra-entry credit in direct

investment-equity, if the direct investor (equity holder)

directly holds equity that entitles it to 10 percent or

more of the voting power in the direct investment enter-

prise; otherwise, the equity claim should be recorded

under portfolio investment-equity. If the market value

of the new liability is lower than the value of the old

debt, a valuation adjustment is recorded under the rel-

evant instrument, such as loan liabilities in the revalua-

tion account (see also paragraph A1.13). In the analytic

presentation, all entries are made above-the-line as in

the standard presentation.

A2.34 In all cases, in the IIP, equity liabilities

(either direct or portfolio) increase and debt liabilities

decrease by the value of the instrument extinguished.

Indirect debt conversion

A2.35 A debt-for-equity swap may also involve

indirect conversion. An example is when a fixed-pay-

ment foreign currency liability (e.g., a debt security or

loan) is exchanged at a discount for a domestic financial

instrument, such as a domestic currency deposit. The

proceeds are then reinvested by the nonresident into the

equity of the debtor. These swaps are valued at market

prices in the balance of payments.

A2.36 In the standard presentation, this transaction

is recorded by the debtor as an increase in liabilities

(credit) under the financial instrument provided, with

corresponding debit entries under the instrument (lia-

bility) being extinguished (Table A1.1, rows 12–16).

Subsequently, the nonresident creditor exchanges the

Appendix 2 g Debt Reorganization and Related Transactions

250

financial instrument received for equity investment

in an enterprise of the debtor economy. At this point,

a credit entry is recorded under direct investment–

equity, if the direct investor (equity holder) directly

holds equity that entitles it to 10 percent or more of

the voting power in the direct investment enterprise;

otherwise, the equity claim should be recorded under

portfolio investment–equity. The offsetting debit

entry is made under the relevant instrument being

exchanged for the equity, such as currency and depos-

its. In the IIP, equity liabilities (either direct or portfo-

lio) increase and debt liabilities decrease by the value

of the instrument extinguished.

A2.37 In the analytic presentation, the treatment is

the same as described for direct debt conversion except

that only the initial transaction is relevant, so the credit

entry is recorded under the relevant financial instru-

ment provided, rather than equity.

d. Debt-for-development swaps

A2.38 A debt-for-development swap involves the

exchange at a discount of an existing liability (e.g., a

debt security or loan) for a claim (such as a domestic

deposit) earmarked for a specific development purpose

in the debtor economy. For example, an NGO purchases

debt from the original creditor at a substantial dis-

count using its own foreign currency resources, and

then resells it to the debtor country government for

local currency equivalent. The NGO in turn spends the

money on a development project, previously agreed on

with the debtor country government.

A2.39 In the standard presentation, the debtor

economy records the transaction only with the

creditor (such as an NGO). The debtor records an

increase in liabilities (credit) under the appropriate

debt instrument provided to the creditor, with an

offsetting debit entry recorded under the appropriate

debt instrument being extinguished (Table A1.1, rows

39–43). In the IIP, liabilities decline by the value of

the debt extinguished and increase by the value of

the other claim provided that it is still outstanding at

the end of the period.

A2.40 If a debt-for-development swap is under-

taken to meet a balance of payments need, only the

initial transaction with the creditor is relevant for the

analytic presentation. Subsequent use by the creditor

of the assets acquired for development in the debtor

economy is not exceptional financing—the credit

items are recorded as capital transfers (Table A1.1,

row 43).

e. Debt prepayment

Definitions

A2.41 Debt prepayments consist of a repurchase,

or early payment, of debt at conditions that are agreed

between the debtor and the creditor; that is, debt is

extinguished in return for a cash payment agreed

between the debtor and the creditor. When a discount

is involved relative to the nominal value of the debt,

prepayments are referred to as “buybacks.” Debt pre-

payment could be driven by the debtor’s need to reduce

the cost of its debt portfolio by taking advantage of

favorable economic performance or market conditions

to repurchase debt, or for balance of payments purposes,

such as a looming balance of payments constraint.

Accounting for debt prepayment

A2.42 In the standard presentation, debit entries

relating to debt prepayment are recorded by the debtor

in the appropriate instrument in the financial account

when the transactions take place at the value of the

debt prepaid. Credit entries are recorded in reserve

assets or in currency and deposits in other invest-

ment–assets depending on the source of financing. In

the IIP, the debtor’s liability declines by the amount

of debt prepaid. As noted in Appendix 1, Exceptional

Financing Transactions, if prepayment of debt is

linked to balance of payments needs and is financed

from reserve assets, both credit and debit items are

recorded below-the-line in exceptional financing and

reserve assets, respectively (Table A1.1, rows 31–32).

Prepayments of debt using debtor’s own financial

assets other than reserve assets is recorded above-the-

line as in standard presentation (Table A1.1, row 33).

If the debt is owed to official creditors and is non-

marketable (loan), some element of debt forgiveness

could arise—that is, if the prepayment occurs within

an agreement between the parties with an intention to

convey a benefit (see paragraph A2.7).

A2.43 In the analytic presentation, debt prepayment

transactions are recorded as exceptional financing only

if they are financed from reserve assets for the balance

of payments purposes of the debtor economy. In this

case, debit entries are recorded below-the-line in the

appropriate instrument in exceptional financing with

offsetting credit entries in reserves recorded below-

the-line.

A2.44 If the prepayment was financed from exter-

nal donor funds, transactions could result in a two-stage

analysis if cash is provided to the debtor economy that

subsequently uses the proceeds to prepay the debt.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

251

Stage 1

A2.45 The debtor economy records in the standard

presentation a credit entry under capital transfers in the

capital account equal to the donor funds provided. An

offsetting debit entry is recorded in reserves assets. In

the analytic presentation, the debtor economy records

a credit entry below-the-line under transfers in excep-

tional financing, with the offsetting debit entry recorded

in reserve assets.

Stage 2

A2.46 When the debt prepayment occurs, the

debtor economy records in the standard presentation

the repayment of the debt instrument as a debit entry

at the value paid, with an offsetting credit entry in

reserve assets. In the analytic presentation, the debit

entry is recorded under the relevant debt instrument

below-the-line

and the credit entry under reserve

assets. Savings arise in future years as a result of the

prepayment of the debt. The debit entry is recorded

below-the-line as the transaction affects reserve assets

in the reporting period.

A2.47 In the IIP of the debtor economy, assets

increase in the first stage and decline, along with debt

liabilities, when the prepayment takes place.

4. Debt assumption and debt payments on

behalf of others

a. Debt assumption

Definition

A2.48 Debt assumption is a trilateral agreement

between a creditor, a former debtor, and a new debtor

under which the new debtor assumes the former debt-

or’s outstanding liability to the creditor and is liable for

repayment of debt. Calling a guarantee is an example

of debt assumption. If the original debtor defaults on its

debt obligations, the creditor may invoke the contract

conditions permitting the guarantee from the guaran-

tor to be called. The guarantor unit then must either

repay the debt or assume responsibility for the debt

as the primary debtor and the liability of the original

debtor is extinguished. Governments can be the debtor

that is defaulting or the guarantor. Also, a government

through agreement can offer to provide funds to pay

off the debt obligation of another government owed to

a third party.

Advance payments for balance of payments need are recorded

below-the-line (see Appendix 1, Exceptional Financing Transactions).

Accounting for debt assumption

A2.49 The amount of the debt to be recorded is the

full amount of the outstanding debt unless there is an

agreement with the creditor to reduce the amount of debt

owed. The timing of the recording is at the time the debt

is removed from the original debtor’s balance sheet.

A2.50 In the standard presentation the transac-

tion recorded between the creditor and debtor is as

described in paragraphs 8.42–8.45 and Box 8.1. The

creditor records a new loan claim on the new debtor.

The extinguishing of the original debt is classified as a

transaction if the original debtor continues to exist, or

as other volume change (with a capital transfer recorded

from the new debtor to the creditor) if the original

debtor no longer exists.

A2.51 In many cases it is likely that the entity

assuming the debt and the original debtor are resident

in the same economy, such as the case of a government

assuming the debt of a resident entity. In such instances,

the sector classification of the debtor may change.

A2.52 However, if the assuming entity was in

a different economy from the original debtor was,

then the nature of the transactions recorded would

depend on whether the assuming economy obtained

a claim on the original debtor and, if not, the rela-

tionship between the two entities. The terms of the

debt assumption may include a legal obligation for the

defaulting entity to pay back to the guaranteeing unit

the amount of debt assumed. If so, in the standard pre-

sentation, the original debtor economy would record

both credit and debit entries under the relevant debt

instrument(s) in the financial account. If no claim was

established, then a capital transfer (debt forgiveness)

would be recorded from the assuming to the original

debtor economy. However, if the original debtor was

in a direct investment relationship with the entity in

the assuming economy, in which instance an increase

in the direct investor’s equity (or decrease if the parent

is the original debtor) would be recorded in the direct

investment enterprise. If the new debtor acquires a

claim that only partially covers the debt acquired, the

difference is classified as debt forgiveness by both the

original and new debtors. If the original debtor no

longer exists, an other volume change is recorded, as

described in paragraph A2.50.

A2.53 In the analytic presentation, if the new

debtor and original debtor are resident in differ-

ent economies, the recording of debt assumption is

the same as for debt rescheduling if the new debtor

acquires a claim on the original debtor. If not, then

Appendix 2 g Debt Reorganization and Related Transactions

252

the recording of the debt assumption is the same

as for debt forgiveness (except in the case of direct

investment as described in the previous paragraph).

When a partial claim is acquired, the recording as

between debt rescheduling and debt forgiveness is

prorated accordingly.

b. Debt payments on behalf of others

Definition

A2.54 Rather than assume the debt, a government

may decide to repay a specific borrowing or make a

specific payment on behalf of another institutional

unit, without the guarantee being called or the debt

being taken over. In this case, the debt stays recorded

solely in the balance sheet of the other institutional

unit, the only legal debtor. As the existing debt

remains extant, and the terms remain unaltered, this

is not considered debt reorganization. Such a situation

may occur where the debtor is experiencing temporary

financial difficulties rather than permanent financial

problems.

Accounting for debt payments on behalf of others

A2.55 As with debt assumption, the recording of

transactions depends on whether the two entities are

located in the same economy or not, and whether or

not the payer receives a financial claim on the debtor

in respect of the debt service payments it has made on

behalf of the debtor.

A2.56 If the paying entity and the original debtor are

resident in the same economy, then no balance of pay-

ments transactions are reported between them. If they

are in different economies, and a claim is established

on the original debtor, the paying economy records an

increase in financial assets and a decrease in reserve

assets or currency and deposits, depending on the

source of funding. Otherwise, as with debt assumption,

a capital transfer or direct investment–equity transac-

tion is recorded. The payment of the debt service is not

recorded as a payment of interest or principal by the

paying economy because the payments are not related

to a liability in its balance sheet.

A2.57 If a financial claim has not been established,

and the transactions arise from a balance of payments

need, in the analytic presentation the debtor country

records a credit entry below-the-line in transfers (other

intergovernmental grants) under exceptional financing

and a debit entry above-the-line reflecting any interest

and principal payments made.

5. Special cases

a. Debt service falling due between Paris

Club agreed minute date and specified

implementation date

A2.58 Under Paris Club debt rescheduling arrange-

ments, creditor countries as a group usually agree in

the nonbinding “Agreed Minute” that they sign, that

payment terms and conditions of applicable debt fall-

ing due before the specified effective (implementation)

date of the Paris Club bilateral agreement might not be

paid on schedule. However, interest continues to accrue

based on the existing loan terms, but payments are not

made, up until the point when there is a formal bilateral

agreement.

A2.59 When such payments fall due, they are consid-

ered technical arrears (External Debt Statistics: Guide

for Compilers and Users, paragraph 3.37). Given that

there is a mutually signed understanding between the

debtor and the creditor that the terms and conditions in

the mother agreement are temporarily suspended, tech-

nical arrears are treated in the standard presentation

of the debtor economy as rescheduled short-term debt

and classified under other investment, other accounts

receivable/payable, until the effective date of the bilat-

eral agreement when the new terms apply.

When the

new terms apply, there may be a need to reclassify

technical arrears to the appropriate instruments in the

financial account.

A2.60 In the analytic presentation, debit entries are

recorded above-the-line as in the standard presenta-

tion, while corresponding credit entries are recorded

below-the-line as accumulation of arrears, in excep-

tional financing.

b. Debt service moratorium extended by

creditors

A2.61 Debt service moratorium involves an indi-

vidual creditor permitting the debtor a formal suspen-

sion of debt service payments falling due within a given

period. Debt service moratorium may be granted in

the event of natural disasters, such as the moratorium

granted to tsunami-affected countries in 2005, and usu-

ally involves formal exchange of letters but not neces-

sarily a formal bilateral agreement.

The guidance in this section is based on the Paris Club arrange-

ments because the issue described most commonly arises in that

forum. But the guidance is equally applicable to other fora in which

the same issue arises.

This approach is applicable to other debt rescheduling arrange-

ments with similar terms.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

253

A2.62 As the intention of the action is to provide the

debtor with short-term debt relief, debt service morato-

rium extended by creditors should be classified as debt

rescheduling, provided there is some formal process that

demonstrates agreement on behalf of both the debtor

and creditor, such as the exchange of letters, to delay

payment. In such instances, arrears are not created. In

the standard presentation for the debtor, a debit entry is

recorded under the appropriate instrument represent-

ing the repayment of obligations as they fall due with

a credit entry under the same instrument representing

the creation of a new debt. In the analytic presentation

of the debtor economy, debit entries of obligations fall-

ing due in the current period are recorded above-the-

line, and contra-entries are recorded as rescheduling

of existing debt under other investment liabilities in

exceptional financing.

B. Transactions Related to Debt

Reorganization

1. New money facilities

A2.63 In some debt reorganization arrangements

to assist the debtor to overcome temporary balance of

payments difficulties, new money facilities are agreed

with the creditor to be used to repay maturing debt

obligations. In the standard presentation, drawings on

the new money facilities are recorded by the debtor as

a credit, and offsetting debit entries are made under

the appropriate instrument, such as reserve assets. As

the maturing debt obligations are paid, debit entries

are recorded under the debt instrument for principal

amounts falling due and under income for interest

accrued in the current period. In the IIP the liabilities

(assets) of the debtor (creditor) are increased by the

new borrowing.

A2.64 In the analytic presentation, a credit entry for

the full amount borrowed is recorded under drawings

on new loans within exceptional financing, with the

offsetting debit entry under reserve assets. Scheduled

debt payments out of the proceeds of the new borrow-

ings are not regarded as exceptional financing; that is,

debit entries are made above-the-line and offsetting

entries under reserve assets, but advance repayments

of debt for balance of payments purposes from reserve

assets are recorded as debit items under exceptional

financing under the relevant financial instrument. If

the terms of the new borrowings are concessional, the

creditor is providing a transfer to the debtor. Debt con-

cessionality is discussed below.

2. Defeasance

A2.65 Defeasance is a technique by which a debtor

exactly matches debt service outflows from a set of

its liabilities with financial assets with the same debt

service inflows, and removes both the asset and liabili-

ties from its balance sheet (see paragraphs 8.30–8.31).

Although a debtor may wish to regard the defeased debt

as being effectively extinguished, the Manual does not

recognize defeasance as affecting the debt of the debtor

as long as there has been no change in the legal obliga-

tions of the debtor. That is, the debt should continue to

be shown on the liabilities side and the financial assets

recorded on the asset side of the balance sheet, and the

transactions associated with those assets and liabilities

recorded in the balance of payments provided they are

with nonresidents. If a separate unit is created to hold

the assets and liabilities, the transactions by which the

assets and liabilities are moved to the second institu-

tional unit are recorded in the financial account, if the

second unit is resident of another economy. If the two

units are resident in the same economy but are clas-

sified in different sectors, a reclassification in other

changes in volume account is recorded.

3. Debt write-offs

A2.66 A creditor can unilaterally decide to write off

debt owed to it. No transactions are recorded but the

creditor economy records the reduction in its financial

assets through the other changes in the volume of assets

account. (The corresponding liability should also be

removed from the balance sheet of the debtor, through

the other changes in volume account.)

4. Debt concessionality

A2.67 Debt concessionality has gained increasing

importance in discussions relating to debt relief to the

heavily indebted poor countries. However, there is no

consistent definition or measure of debt concessionality

in economic accounts. In debt reorganization through

the Paris Club, such as the Heavily Indebted Poor

Countries Initiative and similar arrangements, debt

reduction in present value terms is calculated using a

market-based discount rate, usually the OECD’s Com-

mercial Interest Reference Rate (CIRR).

The differ-

ence between the nominal value of the applicable debt

These rates are determined on the fifteenth day of each month

for applicable currencies on the basis of secondary market yields on

government bonds with residual maturity of five years and, in addi-

tion, three and seven years for the Canadian dollar, the U.S. dollar,

and the euro.

Appendix 2 g Debt Reorganization and Related Transactions

254

and its present value is the amount of capital transfer

derived from the debt reorganization arrangements.

A2.68 Where such transfers are significant, countries

are encouraged to provide these data as a supplemen-

tary

item to the standard components. The recording

should be made as a one-off transaction at the point

of loan origination equal to the difference between the

nominal value of the debt and its present value (using a

relevant market discount rate such as the CIRR). For a

new loan, this approach would require information on

the market interest rate at inception and the contractual

interest rate—with the market interest rate as the dis-

count rate and the difference the value of the transfer.

This approach has the advantage of considering all the

possible sources of transfers in debt concessionality—

maturity period, grace period, frequency of payments,

interest rate, and other applicable costs—and is consis-

tent with nominal valuation of loans. In addition, this

approach is consistent with the economic equivalence

between a concessional loan of say, 100 units with an

embedded grant element of 35 percent, and a commer-

cial loan of 100 units combined with a direct grant of 35

The advantage of a supplementary item in the accounts as

opposed to the main body is that while it allows these transfers to

be measured and data disseminated, it would also allow compilers

to develop their approaches over time without affecting the main

accounts.

units. The transfer value is calculated at the time it hap-

pens, that is, at the inception of the debt, as the difference

between its nominal value and its present value using the

payment stream and the current market interest rate as

the discount factor.

A2.69 If the loan is retired before maturity and

replaced by a new loan, adjustment of the previously

recorded transfers is required. This means that the

value of any transfers not yet received on the original

loan that is replaced would need to be subtracted from

the original transfer value calculated; otherwise, the

amount of concessionality recorded over time would

be overstated.

A2.70 This can be done by recalculating the transfer

at inception using the actual payment schedule outturn,

including the retirement of the entire remaining loan

at the time of rescheduling.

This recalculated value

should replace the originally calculated value in the

historical supplementary series, so the historical data

reflect the actual transfers received and do not mix any

new concessional transfer with the value not received

on the original loan, when there may have been a dif-

ferent set of market-related interest rates.

This retirement value would include any amount that is forgiven

because such forgiveness is recorded as a capital transfer in the

period given.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL