Debt Instruments
Indexed to a Foreign Currency
1993 SNA para. 7.104
Index linked securities in the SNA
7.104. Index linked securities are financial instruments for which the amounts of
the coupon payments (interest) and/or the principal outstanding are linked to a
general price index, a specific price index or an exchange rate index.
When the coupon payments are index linked, the full amounts of such payments
are treated as interest receivable or payable, in the same way as the interest
receivable and payable on any other security paying a contractually agreed
variable income.
When the value of the principal is index linked, the difference between the
eventual redemption price and the issue price is treated as interest accruing over
the life of the asset in the same way as for a security whose redemption price is
fixed in advance. In practice, the change in the value of the principal outstanding
between the beginning and end of a particular accounting period due to the
movement in the relevant index may be treated as interest accruing in that period,
in addition to any interest due for payment in that period. ...
2
Existing Treatment: Concerns?
If denominated in foreign currency: changes in the value of
principal due to exchange rate changes are revaluations.
Indexed to foreign currency: change in the value of
principal due to exchange rate changes are interest.
What is important
The mechanism → indexation
Or the economic substance → fixing the cash flows in
a foreign currency.
Ultimately, what is “denomination?”
3
Example
Loan where disbursement and repayments are made in
pesos.
However, the value of the loan and the interest rate are set
with reference to US dollars.
4
Example
USD bond
USD/Peso exchange rate
Stock
1-Jan
1000
Interest Revaluation
100
0
Stock
31-Dec
1100
200
205
210
USD in peso terms
200000
20500
10500
231000
USD-linked bond, current SNA
200000
31000
0
231000
USD-linked, proposal
200000
20500
10500
231000
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Background
Positions are unaffected, but issue is about the allocation
between:
Interest (income account); and
Revaluation / holding gains or losses (other changes in
assets account).
6
Background
Business accounting practice not helpful in making the
distinction between interest and revaluation.
7
Issues
Proposal would bring about equality between USD
loan and peso loan indexed to USD.
Are there sufficient differences between a debt
denominated in foreign currency and a debt
with both principal and coupons linked to a
foreign currency to warrant a difference in
treatment?
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Issues
Are negative values of interest
payable/receivable acceptable or
meaningful, when general interest rates are
positive?
Or are such fluctuations an indication that
the value is driven by revaluation factors
rather than being a return for supplying
financial resources?
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Do members agree that debt instruments with both principal and
coupons indexed to a foreign currency should be classified and
treated in the national accounts as though they are denominated in
that foreign currency?
Paper was supplied for information at December 2004 AEG meeting. “The
paper proposed that if a financial instrument is indexed to a foreign
currency, it should be treated as if denominated in that foreign currency.
Several participants expressed sympathy with the proposal.”
The IMF Committee on Balance of Payments Statistics:
(1) concluded that debt instruments with both principal and coupons
indexed to a foreign currency should be classified and treated as being
denominated in that foreign currency; and
(2) recommended that the currency of account and currency of settlement
should be clearly distinguished in the new manuals.
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