Financial transactions are transactions in financial assets and liabilities between institutional units, and between them and the rest of the world.
5.02. Considering the definition of a transaction (see paragraph 1.33.), a financial transaction is an interaction between institutional units, or between an institutional unit and the rest of the world, by mutual agreement, involving a simultaneous creation or liquidation of a financial asset and the counterpart liability, or a change in ownership of a financial asset, or an assumption of a liability.
5.03 Financial assets are economic assets, comprising means of payment, financial claims and economic assets which are close to financial claims in nature.
5.04 Means of payment consist of monetary gold, special drawing rights, currency and transferable deposits.
Financial claims entitle their owners, the creditors, to receive a payment or series of payments without any counter-performance from other institutional units, the debtors, who have incurred the counterpart liabilities.
Examples of economic assets which are close to financial claims in nature are shares and other equity and partly contingent assets. The institutional unit issuing such a financial asset is considered to have incurred a counterpart liability.
5.05
Contingent assets are contractual
arrangements between institutional units, and between them and
the rest of the world, which specify one or more conditions which
must be fulfilled before a financial transaction takes place.
Examples are guarantees of payment by third parties, letters of
credit, lines of credit, underwritten note issuance facilities
(NIFs) and many of the derivative instruments. In the system, a
contingent asset is a financial asset in cases where the
contractual arrangement itself has a market value because it is
tradable or can be offset on the market. Otherwise, a contingent
asset is not recorded in the system 
.
5.06 Seven categories of financial assets are distinguished: monetary gold and special drawing rights (AF.1), currency and deposits (AF.2), securities other than shares (AF.3), loans (AF.4), shares and other equity (AF.5), insurance technical reserves (AF.6) and other accounts receivable/payable (AF.7).
5.07 In the system, each financial asset has a counterpart liability, with the exception of those financial assets classified in the category monetary gold and special drawing rights (AF.1). Six categories of liabilities are distinguished corresponding to the categories of the counterpart financial assets.
5.08 The classification of financial transactions corresponds to the classification of financial assets and liabilities. Seven categories of financial transactions are distinguished: transactions in monetary gold and special drawing rights (F.1), transactions in currency and deposits (F.2), transactions in securities other than shares (F.3), transactions in loans (F.4), transactions in shares and other equity (F.5), transactions in insurance technical reserves (F.6) and transactions in other accounts receivable/payable (F.7).
5.09 The financial assets held and the liabilities outstanding at a particular point in time (of a sector or the rest of the world) are recorded in the balance sheet (see chapter 7.). Financial transactions result in changes in balance sheets. However, the changes between the opening balance sheet and the closing balance sheet may also include other flows (see chapter 6.). They are not due to interactions between institutional units, or between them and the rest of the world, by mutual agreement. The other flows are broken down into revaluations in financial assets and liabilities, and changes in the volume of financial assets and liabilities not due to financial transactions. The former are recorded in the revaluation account and the latter in the other changes in the volume of assets account under the categories catastrophic losses, uncompensated seizures, other volume changes in financial assets and liabilities n.e.c., and changes in classifications and structure.
5.10 Financial transactions between institutional units are recorded in the financial accounts of the sectors involved. Financial transactions between institutional units and the rest of the world are recorded in the financial accounts of the sectors involved and the external financial account, that is the financial account of the rest of the world (see chapter 8.).
The financial account (of a sector or the rest of the world) shows on its left side acquisitions less disposals of financial assets, while its right side shows the incurrence of liabilities less their repayment. The balancing item of the financial account, that is net acquisition of financial assets less net incurrence of liabilities, is net lending (+)/net borrowing (-) (B.9).
5.11 The financial account of a sector may be consolidated or non-consolidated. The non-consolidated financial account of a sector shows the changes in financial assets and liabilities due to all financial transactions in which institutional units classified in the sector are involved. The consolidated financial account of a sector shows the changes in financial assets and liabilities due to financial transactions between institutional units classified in the sector under consideration and other institutional units or the rest of the world. Compared to the non-consolidated financial account, the financial transactions between institutional units classified in the sector under consideration are eliminated from the consolidated financial account. The external financial account is consolidated by definition.
5.12 A financial transaction between two institutional units increases net lending/net borrowing of one institutional unit and, by the same amount, decreases net lending/net borrowing of the other institutional unit. Financial transactions between institutional units classified in the same sector do not change net lending/net borrowing of the sector. The consolidated and the non-consolidated financial account of a sector show the same amount of net lending/net borrowing. By the same token, financial transactions between institutional units do not change net lending/net borrowing of the total economy. It is of equal amount but opposite sign to net lending/net borrowing in the external financial account. Therefore, total net lending/net borrowing of all institutional units and the rest of the world is zero.
5.13
The financial account by debtor/creditor (of a sector
or the rest of the world) is an extension of the financial
account, showing in addition a breakdown of the net acquisition
of financial assets by debtor sector and a breakdown of the net
incurrence of liabilities by creditor sector. Therefore, it
provides information on debtor/creditor relationships and it is
consistent with the financial balance sheet by debtor/creditor
(see paragraph 7.69.). In the case of financial transactions
on secondary markets, however, it does not provide information on
the institutional units to whom financial assets were sold or
from whom financial assets were bought, that is to say the
financial account by debtor/creditor provides not a complete
answer on the question who is financing whom in an accounting
period.
5.14 The financial account is the final account, in the full sequence of accounts that records transactions (see chapter 8.). Therefore, the financial account does not have a balancing item that is carried forward to another account. In the system, the balancing item of the financial account is identical with the balancing item of the capital account. In practice, a discrepancy will usually be found between them because they are calculated on the basis of different statistical data.
5.15 Financial transactions always have counterpart transactions in the system. Those counterparts may be other financial transactions or non-financial transactions.
The simultaneous rise or reduction of both financial assets and liabilities, or the exchange of one financial asset for another are recorded wholly within the financial account (of a sector or the rest of the world). In cases where a transaction and its counterpart are both financial transactions, they change the portfolio of financial assets and liabilities and they may change the totals of both financial assets and liabilities of the institutional units involved or the rest of the world, but they do not change net lending/net borrowing or net worth.
The counterparts of financial transactions may also be transactions in products (see chapter 3.), distributive transactions (see chapter 4.) or transactions in non-financial non-produced assets (see paragraph 6.06.). In cases where the counterpart transaction of a financial transaction is not a financial transaction, net lending/net borrowing of the institutional units involved or the rest of the world will change.
5.16 The counterpart transaction of a financial transaction may be a (current or a capital) transfer (see chapter 4.). In this case, the financial transaction involves a change in ownership of a financial asset, or an assumption of a liability as debtor (debt assumption), or the simultaneous liquidation of a financial asset and the counterpart liability (debt cancellation or debt forgiveness). The counterpart transaction of debt assumption and debt cancellation is classified in the category capital transfers (D.9) and is recorded in the capital account.
If the owner of a quasi-corporation assumes liabilities from or cancels financial claims against the quasi-corporation, the counterpart transaction of debt assumption or debt cancellation is a transaction in shares and other equity (F.5).
If government cancels or assumes debt from a public corporation which disappears as an institutional unit in the system, no transaction is recorded in the capital account or the financial account. In this case a flow is recorded in the other changes in the volume of assets account (chapter 6., ‘Other flows').
If government cancels or assumes debt from a public corporation as part of an ongoing process of privatisation to be achieved in a short term perspective, the counterpart transaction is a transaction in shares and other equity. Privatisation means the giving up of control over that public corporation (see paragraph 2.26.) by the disposal of shares and other equity. Such a cancellation or assumption leads to an increase of the own funds (see paragraph 7.05.), regardless as to whether or not this increase of the own funds is due to an issue of shares and other equity.
The writing-off or writing-down of bad debts by creditors and the unilateral cancellation of a liability by a debtor (debt repudiation) are not classified as financial transactions because they do not involve interactions between institutional units, or between institutional units and the rest of the world, by mutual agreement. The writing-off or writing-down of bad debts by creditors is recorded in the other changes in the volume of assets account (see paragraph 6.27. d). Debt repudiation is not recognised in the system.
5.17 The counterpart transaction of a financial transaction may be interest (D.41). Interest is receivable by the creditors and payable by the debtors of certain kinds of financial claims classified in the categories currency and deposits (AF.2), securities other than shares (AF.3), loans (AF.4) and other accounts receivable/payable (AF.7). In the system, interest is recorded on an accrual basis, that is to say interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding (see paragraph 4.50.). The counterpart transaction of an entry in interest (D.41) is always a financial transaction creating an additional financial claim of the creditor against the debtor. The effect of this financial transaction is that interest is reinvested. The actual payment of interest is not recorded in interest (D.41), but it involves a transaction relating to the change in ownership of the means of payment. The counterpart transaction is a financial transaction reducing the net financial claim of the creditor against the debtor. When accrued interest is not paid when due, this gives rise to interest arrears. As accrued interest is already recorded in the system, interest arrears do not change the total of financial assets or liabilities but possibly their classification (see paragraph 5.131.).
5.18 The counterpart transaction of a financial transaction may be property income allocated but not distributed. Examples are interest (D.41) and dividends (D.421) received by mutual funds from the investments they have made and which are allocated but not distributed to shareholders (see paragraphs 4.49. b and 4.54. b), reinvested earnings on direct foreign investment (D.43) and property income attributed to insurance policy holders (D.44) in case of individual life insurance policies not taken out under social insurance schemes. The effect of the counterpart financial transaction is that the (positive or negative) property income is reinvested.