Last week, the G7 countries (UK, France, Germany, Italy, Japan, US, Canada) agreed to allocate SDRs.

UK’s Chancellor of the Exchequer Rishi Sunak said “Today’s milestone agreement among the G7 paves the way for crucial and concerted action to support the world’s low-income countries, ensuring that no country is left behind in the global economic recovery from coronavirus”.

What are SDRs?

SDRs are an asset issued by the International Monetary Fund (IMF) to boost their members’ reserves. It is based on a basket of currencies (US dollar, Japanese yen, euro, pound sterling, Chinese Renminbi) and is referred to using the currency code XDR.

As per the IMF, SDRs are also a means to provide timely support to countries in need. By helping stabilise emerging market and developing countries, an SDR allocation can help mitigate risks of economic and social fragility and enhance stability of international monetary system. This helps support a sustainable and resilient global recovery.

When SDRs are initially allocated to an IMF member country (based on their IMF quota), the member is given two positions – SDR holdings and SDR allocations. Countries receive interest on their holdings and pay interest based on their allocations position.

What is the accounting treatment of SDRs?

The accrual-basis International Public Sector Accounting Standard IPSAS 41 Financial Instruments contains non-authoritative guidance on public sector financial instruments, which includes accounting for SDRs.

SDR holdings represent a claim on the currencies of members of the International Monetary Fund (IMF) and are regarded as financial assets.

SDR allocations represent the obligation assumed when SDR holdings are distributed to the members. IMF members have a contractual obligation to provide currency holdings up to the amount of their SDR allocation, and this represents a financial liability.

The allocation of SDRs is rare. In the past there have been only four allocations of SDRs, the last two being in 2009 after the global financial crisis. A total of $293 billion has been allocated to date.