Major Changes to the Financial Account and

International Investment PositionWorkshop on the Sixth Edition of the Balance of Payments and

International Investment Position Statistics Manual – BPM6

Beirut March 24-26, 2015

Changes from BPM5

BPM6 Appendix 8 Chapter 5: Classification of Financial Assets and Liabilities Chapter 6: Functional Categories Chapter 7: International Investment position (IIP) Chapter 8: Financial Account Chapter 9: Other Changes in Financial Assets and Liabilities

Account

2

Direct Investment

• Direct investment arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise that is resident in another economy (para 6.9)– Control is determined to exist if the investor owns more than 50

percent of the voting power in the enterprise that is resident in another economy;

– A significant degree of influence is determined to exist if the investor owns from 10 to 50 percent of the voting power in the enterprise that is resident in another economy.

• “10 percent rule” remains in BPM6.

3

Direct Investment

• Direct investor: an entity or group of related entities that is able to exercise control or influence over another entity resident in another economy

• Direct investment enterprise (DIE): an entity subject to control or influence

• Fellow enterprises – those enterprises that are under the control or influence of the same immediate or indirect investor, but neither fellow enterprise controls or influences the other fellow enterprise

• Control and/or influence may be direct or indirect, as described in the Framework for Direct Investment Relationships

In this example, B and C are fellows: they are both 100 percent owned by A so they are related even though they have no equity in each other

Economy 1 _________________________________________________________________ Economy 2 100 per cent Economy 3 equity 100 per cent equity

A

B C

Direct investmentFellow enterprises

5

Direct InvestmentIntercompany Debt

• Debt instruments cover intercompany borrowing and lending– Intercompany debt between selected affiliated financial

corporations is not classified as DI debt because it is not considered to be so strongly connected to the direct investment relationship

– these debt positions are included under portfolio or other investment, as appropriate.

Direct InvestmentReverse Investment

• Reverse investment occurs when direct investment enterprises acquire financial claims on their direct investors – There are two different treatments, depending on the nature and

magnitude of the reverse investment

• If the direct investment enterprise acquires at least 10% of the voting power of the direct investor:– two direct investment relationships are established, and claims

between the enterprises are recorded as direct investment assets and direct investment liabilities in both directions

– Using the directional principle, these would be recorded as direct investment abroad and liabilities would be recorded as direct investment in the reporting economy

Direct Investment Reverse Investment

• If the direct investment enterprise owns less than 10% of the voting power in its direct investor:– the provision of a loan or the acquisition of

equity is recorded as:• assets of direct investment enterprises in its

direct investor

• Assets and liabilities between fellows are not considered to be reverse investment

Example of Reverse Investment and Investment in Fellow Enterprises

• Two enterprises (B and C) have same immediate or ultimate direct investor (A), but neither is a direct investor in the other.– Reverse investment (C lends 100 to A); – Investment in fellow enterprises (C lends 250 to B)

50 equity (100 percent)

2 equity 100 loan (100 percent) 250 loan 350 debt issue on international financial markets (unrelated entities)

A

B

C

10

Direct Investment

• In BPM6, direct investment is presented on an assets and liabilities basis, compared to the directional principle presentation in BPM5.

• The differences in value and sign between BPM5 and BPM6 figures for direct investment are therefore due to the re-arrangement of reverse investment.

• Following is an example of the recording of direct investment in BPM5 and BPM6.

BPM5 Credit Debit

Direct investment -13

Abroad -23

Equity capital -10

Claims on affiliated enterprises -10

Liabilities to affiliated enterprises (reverse) 0

Reinvested earnings -3

Other capital -10

Claims on affiliated enterprises -15

Liabilities to affiliated enterprises (reverse) (increase in liability) 5

In reporting economy 10

Equity capital 5

Claims on direct investors (reverse) 0

Liabilities to direct investors 5

Reinvested earnings (loss) -2

Other capital 7

Claims on direct investors (reverse) (decrease in asset) 6

Liabilities to direct investors 1

BPM6 Q1 BPM6 Q1Direct investment 13.00

Net acquisition of financial assets 22.00 Net incurrence of liabilities 9.00 Equity and investment fund shares 13.00 Equity and investment fund shares 3.00 Equity other than reinvestment of earnings 10.00 Equity other than reinvestment of earnings 5.00 Direct investor in direct investment enterprises 10.00 Direct investor in direct investment

enterprises 5.00

Direct investment enterprises in direct investor (reverse investment) 0.00 Direct investment enterprises in direct investor (reverse investment)

0.00

Between fellow enterprises 0.00 Between fellow enterprises 0.00

Reinvestment of earnings 3.00 Reinvestment of earnings -2.00 Debt instruments 9.00 Debt instruments 6.00

Direct investor in direct investment enterprises 15.00 Direct investor in direct investment enterprises

1.00

Direct investment enterprises in direct investor (reverse investment) -6.00 Direct investment enterprises in direct investor (reverse investment)

5.00

Between fellow enterprises 0.00 Between fellow enterprises 0.00

Direct InvestmentValuation

• BPM6 recommends that:– market values be used to value:

• direct investment financial flows• income transactions• equity and marketable debt instruments stock positions (IIP)

– nominal value be used to value:• debt stock positions (other than marketable securities)

Direct InvestmentValuation

• When market value is not available, BPM6 (para 7.16) and BD4 suggest 6 proxies:– Recent transaction price– Net asset value– Present value of future earnings– Market capitalization method– Own funds at book value– Apportioning global value to local activities (using

appropriate indicator such as value added)

Direct InvestmentValuation

– Example: Own funds at book value (OFBV)—values taken from the books of the DIE [para 7.16(e)]

– Sum of:• paid-up capital• all types of reserves identified as equity in the enterprise’s

balance sheet • cumulated reinvested earnings• holding gains or losses included in own funds in the

accounts, whether as revaluation reserves or profits/losses

– Coordinated Direct Investment Survey (recommended method for unlisted equity)

Portfolio Investment

• Portfolio investment is defined as cross-border transactions and positions involving debt or equity securities, other than those included in direct investment or reserve assets. (para 6.54)

• The characteristic feature of securities is their negotiability. – that is, their legal ownership is readily transferable from

one unit to another unit by delivery or endorsement. (para 5.15)

• Negotiable instruments are designed to be traded on organized and other markets. (para 5.15)

Portfolio Investment

• Equity may be split into listed and unlisted shares • Investment fund shares and money market shares are

separately identified

Portfolio Investment Q1 2015

Net acquisition of financial assets (NAFA)

Equity and investment fund shares

Equity securities other than investment fund shares

Listed

Unlisted

Investment fund shares

of which: reinvestment of earnings

of which: money market fund shares or units

Net Recording

• Recording of financial account transactions on a net basis means that purchases and sales of a particular asset within a reporting period are netted out.

Portfolio Investment

Net acquisition of financial assets (NAFA) 50

Equity and investment fund shares 50

Purchases 100

Sales -50

Portfolio Investment

• A treatment for short positions is provided– Short positions occur when an institutional unit

sells securities for which it is not the economic owner. For example, a security subject to a repurchase agreement may be on-sold by the security-receiving party

– The party with the short position records a negative value for the holding of the asset. The short position is shown as a negative asset, rather than a liability.

Financial Derivatives (other than reserves) and Employee Stock Options

● A financial derivative contract is a financial instruments that is:● linked to another specific financial instrument, or indicator or commodity;● through which specific financial risks, such as:

● interest rate risk,● foreign exchange risk,● equity and commodity price risks,● credit risk, and so on

● can be traded in their own right in financial markets (para 5.80)

● Employee stock options are recognized as an instrument

OTHER INVESTMENT

Other investment is a residual category, comprising all transactions not included under direct investment, portfolio investment, financial derivatives , and reserve assets.Reflects the following instruments:– other equity– currency and deposits– loans– insurance, pension, and standardized guarantees schemes– trade credits and advances– other accounts receivable/payable – and special drawing rights (SDR allocations)

Other InvestmentInstrument breakdown

Other equity• equity not in the form of securities, or reserve assets• not included under direct investmentExamples: • subscription to international organizations e.g. World Bank and BIS• subscription in regional international organizations, e.g. CB of monetary union• or participations (voting power) of less than 10 percent

Other Investment Instrument breakdown

Loans include:• Financial leases• Repurchase agreements (Repos) and gold swaps• Debt assumption• Credit and loans with the Fund Currency and deposits:• New in BPM6 are Interbank positions, that can be shown as a

separate component of deposits – In some cases the instrument classification of interbank positions may be unclear, e.g. loans, transferable/non-transferable deposits. Therefore, by convention, to assure symmetry, all interbank positions other than securities and accounts receivable/payable are classified under deposits (para 5.42.)

Other Investment Instrument breakdown

Insurance technical reserves, pension fund entitlements, and provisions for calls under standardized guarantees Insurance reserves and pension entitlements are recognized as assets

and liabilities The accrued obligations of unfunded pension schemes are also

recognized as economic assets and liabilities Provisions for calls under standardized guarantees are identified and

treated similarly to insurance technical reserves An overview is given in Appendix 6c of BPM6Allocations of Special Drawing Rights The allocation of SDRs to IMF member countries is shown in the

incurrence of liabilities of the recipient under SDRs in other investment with a counter-entry under SDRs in reserve assets

Other acquisitions and sales of SDRs are included in reserve assets (SDR Holdings)

Reserve Assets• Monetary gold is defined in terms of gold bullion (which

includes allocated gold accounts) and unallocated gold account

• The treatments of gold lending, repos, special purpose government funds, pooled assets, central bank swap arrangements, and pledged assets in reserve assets are elaborated.

• Frozen assets are discussed• Working balances of government agencies are not included

in reserve assets

Reserve Assets

Monetary gold

Gold bullion

Unallocated gold accounts

Reserve-related liabilities

• Reserve-related liabilities are defined as foreign currency liabilities to nonresidents associated with reserve assets of the monetary authorities,

– i.e., liabilities in foreign currency that can be regarded as direct claims by nonresidents on the reserve assets of a country.

• Short-term reserve-related liabilities are a memorandum item to the IIP.

International Investment Position

• The IIP is a statistical statement that shows, at a point in time, the value and composition of:– the financial assets that are claims on nonresidents or

gold bullion held as reserve assets– the liabilities of residents of an economy to nonresidents.

• A point in time, usually refers to the beginning of the period (opening value) or end of period (closing value).

• Details of currency composition and remaining maturity are included for selected position data in memorandum and supplementary tables

Other Changes in Financial Assets and Liabilities

• BPM6 Chapter 9• Even if you don’t compile this account, you

need to understand it: – to distinguish between transactions and non-

transactions;– to understand the causes of changes in balance

sheets over time.

Other Changes in Financial Assetsand Liabilities

Integrated IIP Statement: beginning-of-period value; + changes during period:

transactions (financial account);non-transaction changes (other changes in financial

assets and liabilities account):other changes in volume; revaluation due to:

exchange rate movements;other price changes;

= end-of-period value.

Integrated IIP StatementTable 7.1. Integrated International Investment Position Statement

(including link to financial and other changes accounts)

IIP IIPFinancial account

Exchange rate

changesOther price

chnagesAssets: Direct investment

Portfolio investment

Financial derivatives (other than reserves) and

employee stock options

Other investment

Reserve assets

Total assetsof which:

Equity and investment fund shares

Debt instruments

Other financial assets and liabilities

Liabilities :

Direct investment

Portfolio investment

Financial derivatives (other than reserves) and

employee stock options

Other investment

Total liabilitiesof which:

Equity and investment fund shares

Debt instruments

Other financial assets and liabilities

Net IIP

Other changes in assets and liabilities account

Transactions

Other changes in

volume

Changes in position due to:

Accumulation accounts entries

End of period

IIP

Beginning of period

IIP

Revaluation

Revaluation

• Because of importance of instruments denominated in foreign currencies in international accounts, revaluation is split between:– revaluation due to changes in the exchange rate;– revaluation due to other price changes.

Total change -2,455.9

Financial Flows 0.1

Valuation Adjustments -2,456.0

Price changes -1,954.3

Exchange-rate changes

-681.1

Other valuation changes

179.4

Total change -1038.5

Financial Flows 534.1

Valuation Adjustments -1572.5

Price Changes -1234.2

Exchange-rate changes

-98.0

Other valuation changes

-240.3

Changes inU.S.-Owned Assets Abroad,Excluding Financial Derivatives*, 2008 (billions of dollars)

Changes inForeign-Owned Assets in the U.S.Excluding Financial Derivatives*, 2008 (billions of dollars)

Bureau of Economic Analysis - Survey of Current Business, July 2009 – The International Investment Position of the United States at Yearend 2008. Note: The current-cost method is used to value direct investment.*With Direct Investment at Current Cost

Total change 1,749.7

Financial Flows 140.5

Valuation Adjustments 1,609.2

Price changes 1,066.1

Exchange-rate changes

358.0

Other valuation changes

185.1

Total change 961.9

Financial Flows 305.7

Valuation Adjustments 656.2

Price Changes 543.2

Exchange-rate changes

81.2

Other valuation changes

31.8

Changes inU.S.-Owned Assets Abroad,*excluding Financial Derivatives, 2009 (billions of dollars)

Changes inForeign-Owned Assets in the U.S.,*excluding Financial Derivatives,2009 (billions of dollars)

Bureau of Economic Analysis - Survey of Current Business, July 2010 – The International Investment Position of the United States at Yearend 2009. Note: The current-cost method is used to value direct investment.*With Direct Investment at Current Cost

Other Changes in the Volume

Examples of other changes in volume:debt cancellation and write-offs;reclassifications (including monetization and demonetization

of gold bullion);financial assets and liabilities of persons and other entities

changing residence; Changes in insurance reserves, pension entitlements, and

provisions for standardized guarantee schemes because of changes in actuarial assumptions.