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CLASSIFICATION OF FINANCIAL TRANSACTIONS 5.A1.01 Financial transactions may be classified according to different criteria: by type of financial instrument, negotiability, type of income, maturity, currency and type of interest. Classification of financial transactions by category 5.A1.02 Financial transactions are classified in categories and subcategories as shown in Table 5.3. This classification of the transactions in financial assets and liabilities corresponds to the classification of financial assets and liabilities. 5.A1.03 The classification of financial transactions and of financial assets and liabilities is based primarily on the liquidity, the negotiability and the legal characteristics of the financial instruments. The definitions of the categories are in general independent of the classification of institutional units. The classification of financial assets and liabilities can be further detailed by a cross-classification by institutional unit. An example is the cross-classification of transferable deposits between deposit taking corporations, other than the central bank, as inter-bank positions. Classification of financial transactions by negotiability

5.A1.04 Financial claims can be distinguished by whether they are negotiable or not. A claim is negotiable if its ownership is readily capable of being transferred from one unit to another by delivery or endorsement or of being offset in the case financial derivatives. While any financial instrument can be potentially traded, negotiable instruments are designed to be traded on an organised exchange or 'over-the-counter', although actual trading is not a necessary condition for negotiability. Necessary conditions of negotiability are:

(a) transferability or offsetability in the case of financial derivatives;

(b) standardisation often evidenced by fungibility and eligibility of an ISIN code; and (c) that the holder of an asset does not retain the right of recourse against the previous holders.

5.A1.05 Securities, financial derivatives and employee stock options (AF.7) are negotiable financial claims. Securities include debt securities (AF.3), listed shares (AF.511), unlisted shares (AF.512), and investment fund shares (AF.52). Financial derivatives and employee stock options are not classified as securities even if they are negotiable financial instruments. They are linked to specific financial or non-financial assets or indices through which financial risks can be traded in financial markets in their own right. 5.A1.06 Monetary gold and SDRs (AF.1), currency and deposits (AF.2), loans (AF.4), other equity (AF.519), insurance, pension and standardised guarantee schemes (AF.6) and other accounts receivable/payable (AF.8) are not negotiable. Structured securities

5.A1.07 Structured securities typically combine a security, or a basket of securities, with a financial derivative, or a basket of financial derivatives. Financial instruments which are not structured securities are, for instance, structured deposits which combine characteristics of deposits and of financial derivatives. While debt securities typically involve payment at inception of a principal to be repaid, financial derivatives do not. Classification of financial transactions by type of income

(d) natural growth of uncultivated biological resources, such as natural forests and the stock of fish, where the growth in such economic assets is not under the direct control, responsibility and management of an institutional unit and thus not treated as production;

(e) transfers of other natural resources to economic activity: natural resources that change status to qualify as economic assets. Examples include the initial exploitation of virgin forests, transfer of land from a wild or waste state to land that can be put to economic use, land reclamation and initial charging for extraction of water. The natural resources may also acquire value due to economic activity in the vicinity, for example, land may be recognised as valuable because of a nearby development or creation of an access road. The cost of land improvements is recorded as gross fixed capital formation but any excess in the increase of value of the land over the value of the land improvements is recorded as economic appearance;

(f) quality changes in natural assets due to changes in economic uses. Changes in quality are recorded as changes in volume. The quality changes recorded here occur as the counterpart of the changes in economic use that are shown as changes in classification (see paragraph 6.21). For example, the reclassification of cultivated land to land underlying buildings may result in an increase in value as well as a change in classification. In this case the asset is already within the asset boundary and it is the change in quality of the asset due to the change of economic use that is regarded as the appearance of an asset. Another example is the increase in value of dairy cattle when sent to slaughter earlier than expected;

(g) initial appearance of value from granting transferable contracts, leases, licences or permits. The value in such contracts, leases, licences or permits represents an asset when the value of the entitlement they give exceeds the fees payable and the holder can realise this by transferring them to others; and

(h) changes in the value of goodwill and marketing assets, which materialises when institutional units are sold at prices that exceed their own funds (see paragraph 7.07); the excess of purchase price over own funds is referred to as purchased goodwill and marketing assets. Goodwill not evidenced by a sale/purchase is not considered as an economic asset. Economic disappearance of non-produced assets (K.2) 6.07 Economic disappearance of non-produced non-financial assets includes:

(a) depletion of natural resources, which covers the reduction of the value of deposits of subsoil assets, and the depletion of uncultivated biological resources included in the asset boundary (see point (e) of paragraph 6.06) as a result of harvesting, forest clearance or use beyond sustainable levels of extraction. Many of the possible entries here are the opposite of the entries described in points (c) to (f) of paragraph 6.06;

(b) other economic disappearance of non-produced assets, which covers:

(i) the writing-down of the value of purchased goodwill and marketing assets; and (ii) the expiration of the advantages given by transferable contracts, leases, licences and permits.

Catastrophic losses (K.3) 6.08 Catastrophic losses recorded as other changes in volume result from large-scale, discrete and recognisable events that destroy economic assets.

6.09 Such events include major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, drought and other natural disasters; acts of war, riots and other political events; and technological accidents such as major toxic spills or release of radioactive particles into the air. Examples of such events are:

(a) deterioration in the quality of land caused by abnormal flooding or wind damage;

(b) destruction of cultivated assets by drought or outbreak of disease;

(c) destruction of buildings, equipment or valuables in forest fires or earthquakes; and (d) accidental destruction of currency or bearer securities as a result of natural catastrophes or political events, or destruction of evidence of ownership. Uncompensated seizures (K.4)

6.10 Uncompensated seizures occur when governments or other institutional units take possession of the assets of other institutional units, including non-resident units, without full compensation, for reasons other than the payment of taxes, fines or similar levies. The seizure of property related to criminal activity is considered to be a fine. The uncompensated part of such unilateral seizures is recorded as other change in volume.

6.11 Foreclosures and repossessions of assets by creditors are not recorded as uncompensated seizures because, either explicitly or by general understanding, the agreement between the parties provides for this avenue of recourse. Other changes in volume not elsewhere classified (K.5) 6.12 Other changes in volume not elsewhere classified (K.5) are the effects of unexpected events on the economic value of assets.

6.13 Examples of other changes in volume not elsewhere classified of non-financial assets include:

(a) unforeseen obsolescence. Assumptions used in deriving consumption of fixed capital will not cover unforeseen obsolescence in fixed assets. The amount included for their expected obsolescence may fall short of the actual obsolescence. Entries must, therefore, be made for the decline in the value of the fixed assets resulting from, for example, the introduction of improved technology;

(b) differences between allowances included in consumption of fixed capital for normal damage and actual losses. Consumption of fixed capital does not cover unforeseen damage, and the amount estimated for normally expected damage may fall short or exceed the actual damage. Adjustments must, therefore, be made for the unforeseen decline or increase in the value of the fixed assets due to such events. The losses adjusted for here are not sufficiently large to be considered catastrophic;

(c) degradation of fixed assets not accounted for in consumption of fixed capital. This covers the decline in the value of fixed assets from, for example, the unforeseen effects of acidity in air and rain on building surfaces or vehicle bodies;