Major Changes to the
Financial Account and
International Investment Position
Workshop 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
Direct investment
Fellow enterprises
 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
A
_________________________________________________________________
Economy 2
100 per cent
Economy 3
equity
100 per cent equity
B
C
5
Direct Investment
Intercompany 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 Investment
Reverse 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)
A
50 equity
(100 percent)
2 equity
(100 percent)
100 loan
B
250 loan
C
350 debt issue on
international financial markets
(unrelated entities)
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 rearrangement 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
Liabilities to affiliated enterprises (reverse) (increase in liability)
In reporting economy
Equity capital
-15
5
10
5
Claims on direct investors (reverse)
0
Liabilities to direct investors
5
Reinvested earnings (loss)
Other capital
-2
7
Claims on direct investors (reverse) (decrease in asset)
6
Liabilities to direct investors
1
BPM6
Direct investment
Net acquisition of financial assets
Equity and investment fund shares
Equity other than reinvestment of earnings
Direct investor in direct investment enterprises
Direct investment enterprises in direct investor (reverse investment)
Q1
BPM6
Q1
Net incurrence of liabilities
9.00
13.00
22.00
13.00
10.00
10.00
0.00
Equity and investment fund shares
Equity other than reinvestment of earnings
3.00
5.00
Direct investor in direct investment
enterprises
5.00
Direct investment enterprises in direct
0.00
investor (reverse investment)
Between fellow enterprises
Reinvestment of earnings
Debt instruments
0.00
Between fellow enterprises
0.00
3.00
Reinvestment of earnings
-2.00
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 Investment
Valuation
• 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 Investment
Valuation
• 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 Investment
Valuation
– 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
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
Q1 2015
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)
Equity and investment fund shares
50
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 Investment
Instrument breakdown
Other equity
• equity not in the form of securities, or reserve assets
• not included under direct investment
Examples:
• 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/nontransferable 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 BPM6
Allocations 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
Reserve Assets
Monetary gold
Gold bullion
Unallocated gold accounts
•
•
•
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-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 nontransactions;
– to understand the causes of changes in balance
sheets over time.
Other Changes in Financial Assets
and 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 Statement
Table 7.1. Integrated International Investment Position Statement
(including link to financial and other changes accounts)
IIP
Beginning
of period
IIP
Assets:
Direct investment
Portfolio investment
Financial derivatives (other than reserves) and
employee stock options
Other investment
Reserve assets
Total assets
of 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 liabilities
of which:
Equity and investment fund shares
Debt instruments
Other financial assets and liabilities
Net IIP
Accumulation accounts entries
Financial
Other changes in assets and liabilities
account
account
Changes in position due to:
Revaluation
Transactions
Other
changes in
volume
Exchange
rate
changes
Other price
chnages
IIP
End
of period
IIP
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.
Changes in
U.S.-Owned Assets Abroad,
Excluding Financial Derivatives*,
2008 (billions of dollars)
Total change
Financial Flows
Valuation Adjustments
Changes in
Foreign-Owned Assets in the U.S.
Excluding Financial Derivatives*,
2008 (billions of dollars)
-2,455.9
0.1
-2,456.0
Total change
Financial Flows
Valuation Adjustments
-1038.5
534.1
-1572.5
Price changes
-1,954.3
Price Changes
-1234.2
Exchange-rate
changes
-681.1
Exchange-rate
changes
-98.0
Other valuation
changes
179.4
Other valuation
changes
-240.3
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
Changes in
U.S.-Owned Assets Abroad,*
excluding Financial Derivatives,
2009 (billions of dollars)
Total change
Financial Flows
Valuation Adjustments
Changes in
Foreign-Owned Assets in the U.S.,*
excluding Financial Derivatives,
2009 (billions of dollars)
1,749.7
140.5
1,609.2
Total change
961.9
Financial Flows
305.7
Valuation Adjustments
656.2
Price changes
1,066.1
Price Changes
543.2
Exchange-rate
changes
358.0
Exchange-rate
changes
81.2
Other valuation
changes
185.1
Other valuation
changes
31.8
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.