Additional detail

7.7 This edition of the Manual reflects the increasing emphasis on the IIP in international accounts compilation and analysis. There has been growing recognition of the role of balance sheet analysis in understanding sustainability and vulnerability, including currency mismatches, the implications of sector and interest rate composition of debt, and the effect of the maturity structure on liquidity. IIP data are useful for other purposes, such as measuring rates of return, analyzing economic structure, and studying the relationship to domestic sources of financing.

7.8 Consequently, a currency composition and remaining maturity analysis of the IIP are encouraged as additional information. To meet this goal, memorandum and supplementary tables have been introduced in Appendix 9, and are shown after the standard components. These tables provide a presentation of currency composition of assets and liabilities by sector with a distribution by principal foreign currencies, including the U.S. dollar, euro, yen, and others, together with a breakdown by original maturity. The tables also provide information on the remaining maturity of long-term debt liabilities, with a breakdown by sector. These tables are consistent with the standard components of the IIP and with the presentation adopted in External Debt Statistics: Guide for Compilers and Users.

For additional information

7.9 Several other guides provide specialized guidance on particular aspects of the IIP and related statistics, namely:

• BIS, Guide to the International Financial Statistics (BIS Paper No. 14, February 2003);

• IMF, Coordinated Direct Investment Survey Guide;

• IMF, Coordinated Portfolio Investment Survey Guide;

• IMF and others, External Debt Statistics: Guide for Compilers and Users;

• IMF, International Investment Position: A Guide to Data Sources;

• IMF, International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template; and

• OECD, OECD Benchmark Definition of Foreign Direct Investment.

These guides are based on the same core principles, with additional elements including more detail, alternative valuations, discussion of implementation issues, and additional items, such as contingencies, guarantees, and other off-balance-sheet items.

1. Definition of economic assets

7.10 The IIP covers the subset of financial assets and liabilities that have an international character. In most cases, the international character of a financial asset or liability arises because, of the two parties, one is a resident and the other is nonresident. The gold bullion component of monetary gold is the only case of a financial asset with no counterpart liability. The scope and definitions of different types of economic assets is given in paragraphs 5.2–5.14.

7.11 The concept of ownership of assets in the IIP is based on economic ownership, as defined in paragraph 3.41. The economic owner is the party who has the risks and rewards of holding the asset. Ownership of financial assets can be complex in some legal arrangements, for example, the lessor under a financial lease has the legal title, while the lessee has most of the risks and benefits of ownership. (For further details on financial leases, see paragraphs 5.56–5.59 and 7.57.)

2. Classification

7.12 Possible dimensions for the classification of the IIP are:

1. Functional category—direct investment, portfolio investment, financial derivatives (other than reserves) and ESOs, other investment, and reserve assets, as defined in Chapter 6;

2. Financial instrument—according to the broad groupings (equity and investment fund shares, debt instruments, and other financial assets and liabilities) or the full breakdown, as defined in Chapter 5;

3. Institutional sector of resident party—at least, central bank, deposit-taking corporations except the central bank, general government, and other sectors; other sectors is split between other financial corporations and the remaining non-financial subsectors (nonfinancial corporations, households, and NPISHs), as defined in Chapter 4, Section D. Additional subsectoring of the financial and nonfinancial sectors may be undertaken when analytically relevant;

4. Maturity (in the case of debt instruments)—short-term or long-term, by original and remaining maturity, as defined in paragraphs 5.103–5.105;

5. Currency—domestic or foreign currency, as defined in paragraphs 3.95–3.97 for debt and 3.100 for equity; and (in the case of financial derivatives) to receive or pay foreign currency, as defined in paragraph 5.108; and

6. Interest rate structure (in the case of debt instruments)—variable- or fixed-rate, as defined in paragraphs 5.109–5.114.

Sector, maturity, and currency are relevant to studies of sustainability, vulnerability, and exposure to exchange rate changes (after taking into account any hedging). The remaining maturity is important to the debtor, but it is less relevant for the creditor with liquid instruments, in that the assets can be sold before maturity. In addition to the institutional sector of the resident party, as in (c), the institutional sector of nonresident counterparty may also be of interest in some cases (e.g., governments may wish to distinguish between other governments, international organizations, and other sources of their borrowing).

7.13 A consistent classification should be used as far as possible for IIP and other related accounts. The stock of assets and liabilities, financial account transactions, and other changes in financial assets and liabilities all relate to the same instruments, so a consistent classification is necessary for a comprehensive analysis of relationships between them. Similarly, a consistent level of detail for income (and possibly holding gains or losses, for some purposes) and positions allows the estimation of rates of return. Although the international accounts functional classification of assets and liabilities is not used in the SNA or financial statistics, the instrument and institutional sector classifications are the same. The inclusion of instrument and sector detail in IIP data facilitates understanding and checking the linkages with other data sets such as monetary and financial statistics.

1. Valuation of unlisted and other equity

7.15 Shares and other equity can be readily valued at their current prices when they are regularly traded on stock exchanges or other financial markets. However, there may be no observable market prices for positions in equity not listed on a stock exchange (i.e., items (b) and (c) in paragraph 5.24). This situation often arises for direct investment enterprises, private equity, equity in unlisted and delisted companies, listed but illiquid companies, joint ventures, and unincorporated enterprises.

7.16 When actual market values are not available, an estimate is required. Alternative methods of approximating market value of shareholders’ equity in a direct investment enterprise include the following:¹

1. Recent transaction price. Unlisted instruments may trade from time to time, and recent prices, within the past year, at which they were traded may be used. Recent prices are a good indicator of current market values to the extent that conditions are unchanged. This method can be used as long as there has been no material change in the corporation’s position since the transaction date. Recent transaction prices become increasingly misleading as time passes and conditions change.

2. Net asset value. Appraisals of untraded equity may be conducted by knowledgeable management or directors of the enterprise, or provided by independent auditors to obtain total assets at current value less total liabilities (excluding equity) at market value. Valuations should be recent (within the past year) and should preferably include intangible assets.

3. Present value and price-to-earnings ratios. The present value of unlisted equity can be estimated by discounting the forecast future profits. At its simplest, this method can be approximated by applying a market or industry price-to-earnings ratio to the (smoothed) recent past earnings of the unlisted enterprise to calculate a price.² This method is most appropriate in which there is a paucity of balance sheet information but earnings data are more readily available.

4. Market capitalization method. Book values reported by enterprises can be adjusted at an aggregate level by the statistical compiler. For untraded equity, information on “own funds at book value” (see paragraph 7.16(e)) can be collected from enterprises, and then adjusted with ratios based on suitable price indicators, such as the ratio of market capitalization to book value for listed companies in the same economy with similar operations. Alternatively, assets that enterprises carry at cost (such as land, plant, equipment, and inventories) can be revalued to current period prices using suitable asset price indices.

5. Own funds at book value. This method for valuing equity uses the value of the enterprise recorded in the books of the direct investment enterprise, as the sum of (a) paid-up capital (excluding any shares on issue that the enterprise holds in itself and including share premium accounts); (b) all types of reserves identified as equity in the enterprise’s balance sheet (including investment grants when accounting guidelines consider them company reserves); (c) cumulated reinvested earnings; and (d) holding gains or losses included in own funds in the accounts, whether as revaluation reserves or profits or losses. The more frequent the revaluation of assets and liabilities, the closer the approximation to market values. Data that are not revalued for several years may be a poor reflection of market values.

6. Apportioning global value. The current market value of the global enterprise group can be based on the market price of its shares on the exchange on which its equity is traded, if it is a listed company. Where an appropriate indicator may be identified (e.g., sales, net income, assets, or employment), the global value may be apportioned to each economy in which it has direct investment enterprises, on the basis of that indicator, by making the assumption that the ratio of net market value to sales, net income, assets, or employment is a constant throughout the transnational enterprise group. (Each indicator could yield significantly different results from the others.)

7.17 In cases in which none of the above methods are feasible, less suitable data may need to be used as data inputs. For example, cumulated flows or a previous balance sheet adjusted by subsequent flows may be the only sources available. Because these sources use the prices of previous periods, they should be adjusted for subsequent price developments, for example, by using aggregate share price or asset price indexes and by taking into account exchange rate movements, where relevant. The use of unadjusted summing of past transactions is not recommended. Equity represents owners’ funds. The means through which equity can be generated may take various forms, such as share issues, equity injections without any commensurate issue of shares (sometimes called “contributed surplus” or “capital contributions”), share premiums, accumulated reinvested earnings, or revaluation. Although these categories should be taken into account when cumulated flows are used to measure the value of equity, the different categories are all components of equity and need not be identified separately.

7.18 If the current market price is not directly observable, the decision about the methods to adopt should take into account the availability of information as well as judgments as to which available method best approximates market values. Different methods may be suitable for different circumstances and a standard ranking of the alternative methods is not proposed for valuing instruments when current market prices are not directly observable. Compilers should be transparent and should state clearly the method(s) used. Methods for valuation of direct investment equity positions are discussed in more detail in the OECD Benchmark Definition of Foreign Direct Investment. These methods may also be useful for valuation of other unlisted equity securities and other equity.

7.19 The value of a direct investment enterprise’s nonequity liabilities may exceed its assets—this situation can occur most commonly in the early or final stages of its existence.

2. Entities that borrow on behalf of their affiliates

7.20 An entity resident in one economy may borrow funds on behalf of affiliated enterprises in one or more other economies. The affiliates may include holding companies, parent companies, direct investment enterprises, and fellow enterprises. Examples include SPEs, sometimes called conduits, which may be used to undertake the borrowing, or an entity with substantial activities of its own may do the borrowing. In these cases, the liability is often guaranteed by the parent or a fellow enterprise. Alternatively, the affiliated enterprise may commit future revenue streams. Regulatory or taxation benefits may be factors behind such arrangements. In these cases, the creditor records a claim on the entity that directly undertakes the borrowing. That is, the creditor does not show its claim as being on the enterprise that ultimately receives the funds or makes the guarantee.

7.21 When funds raised are passed on by the borrowing entity to an affiliated enterprise, the initial borrowing entity has a claim on the affiliated enterprise. This arrangement can be assumed to give rise to a loan, unless there is evidence that it is a debt security or equity. This borrowing can arise for pass-through funds (discussed in paragraphs 6.33–6.34), conduits (paragraph 4.86), and SPEs and similar legal structures (paragraph 4.87). In many cases, such investment is reverse investment or investment between fellow enterprises, as discussed in paragraphs 6.39–6.41 and 6.43, respectively.

7.22 Special rules apply to an entity owned or controlled by general government when that entity is resident in another territory and is used for fiscal purposes. These rules are discussed in paragraphs 8.24–8.26.

3. Quasi-corporations

7.23 The identification of institutional units for branches, notional resident units for ownership of land and natural resources, some joint ventures, and preparatory operations prior to incorporation and other quasi-corporations is discussed in paragraphs 4.26–4.49. The effect of the identification of such institutional units is that owners are shown as having a claim on the institutional unit, rather than as directly owning the various individual assets.

7.24 Owners’ claims on quasi-corporations that are resident in other economies are usually classified as direct investment. In the rare cases in which the proportion of equity in land or a joint venture is less than 10 percent, the claim is classified as other investment—other equity.

7.25 Equity in quasi-corporations should be valued as equal to the market value of the quasi-corporations’ assets less the market value of liabilities other than equity to both residents and nonresidents. (This method would mean that quasi-corporations have no residual net worth.) Alternatively, equity in quasi-corporations may be valued using the same methods as used for direct investment equity, discussed in paragraphs 7.16–7.17.

1. Equity with dividends declared payable but not yet paid

7.26 In market quotations, dividends declared payable but not yet paid are taken into account in the share price. After the point of time when ownership of shares is determined for the purposes of payment of dividends, the shares go “ex dividend.” (Ex dividend is the point at which the shares no longer carry the right to the most recently declared dividend; so the dividend becomes separated from the share and the price falls to reflect that.) After that time, dividends declared should be included in accounts receivable/payable until payment is made.

2. Debt instruments with accrued interest

7.27 Accrued interest not yet paid on debt securities should be included in the outstanding amount of the financial asset or liability. Accrued interest not yet paid includes interest that has accrued and that is not yet due for payment or that is due for payment but in arrears. Accrued interest not yet paid should not be reported separately (such as in other accounts receivable/payable). In market quotations, a value including interest that has accrued but is not yet payable is called the “dirty price” and is suitable for valuation of items in the IIP (provided interest due and not yet paid is also included). In contrast, the “clean price” requires accrued interest not yet paid to be added for use in the IIP. Methods of calculating the accrual of interest are discussed in paragraphs 11.48–11.76.

3. Short positions

7.28 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 (see paragraphs 5.52–5.54 on repurchase agreements). Delivery to the purchaser is made through the use of a borrowed security. 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. (Short positions have been included on the research agenda for further work; see paragraph 1.43.)

4. Unlisted debt and equity securities

7.29 Positions in unlisted portfolio investment equity securities without an observable market price may be valued using methods discussed in paragraphs 7.16–7.17 for direct investment equity. Some listed debt securities also may have no quoted prices, for example, if the market is illiquid or the security ceases trading due to suspension, default, or bankruptcy. A market price can be estimated for such debt securities by discounting future cash flows using a discount rate that takes into account the risk of default (present value approach).

5. Debt securities at nominal values

7.30 Whereas the basic valuation method for debt securities is the market value, the nominal value is encouraged as a supplementary item. External Debt Statistics: Guide for Compilers and Users recommends that both valuations be used. The nominal value of debt securities is a useful measure of value from the viewpoint of the debtor, because at any moment, it is the amount that the debtor owes to the creditors.

6. Zero-coupon and deep-discount bonds

7.31 A zero-coupon bond has a single payment at maturity and no coupon payments. The bond is sold at a discount from face (or par) value, and at maturity, an amount equal to face value is repaid. The difference between the discounted issue price and the face value reflects the market rate of interest at the time of issue—the longer the maturity of the bond and the higher the market interest rate, the greater the discount against the face value. The accrual of interest on zero-coupon bonds is discussed in paragraph 11.55 and is illustrated in Box 11.2.

7.32 A deep-discount bond is a bond that has a low coupon compared with the market rate of interest, so that it is issued at a considerable discount to face value. Like the zero-coupon bond, the difference between the issue price and face value accrues as interest over the life of the bond, and the market value of the bond increases as the interest accrues. The accrual of interest on deep-discount bonds is discussed in paragraph 11.56.

1. Valuation of nonnegotiable instruments

2. Financial leases

7.57 A financial lease is defined in paragraph 5.56. The treatment of financial leases is designed to capture the economic reality of the arrangements. It moves away from the legal form by treating goods under a financial lease as if they were purchased and owned by the user. The financial lease is shown as a loan from the lessor to the lessee that is used to finance the acquisition of a fixed asset by the lessee. Financial leases affect goods, services, income, financial transactions, and positions.

3. Recording of positions associated with securities repurchase agreements and other reverse transactions

7.58 Reverse transactions are arrangements that involve a change of legal ownership of securities or gold with a commitment to repurchase the same or similar securities or gold either on a specified date or with open maturity. They include securities repurchase agreements, gold swaps, securities lending, and gold loans. The commitment to reverse the change in legal ownership in the future at a fixed price means that the original owner retains the risks and rewards of changes in the price of the asset. Accordingly, there is considered to be no change of economic ownership of the security or gold, so no transaction in that security or gold is recorded, and ownership of the asset as shown in the IIP is unchanged.

7.59 A reverse transaction may be with or without the supply of cash. If cash is supplied, as in a repurchase agreement (repo or securities lending with cash collateral), and in return the other party supplies securities, the arrangement is regarded as giving rise to a loan or deposit. (The classification of the cash supplied is discussed in paragraphs 5.52–5.54.) Analogously to repos, a gold swap for cash is treated as being a loan with the gold as collateral, and there is no change in the economic ownership of the gold.

7.60 There may be problems in attributing securities ownership when using custodians as a data source, because custodians may not know whether securities being held are under a repurchase agreement or not.

7.61 If a party that receives securities under a reverse transaction on-sells the securities to a third party, then it has a short position. The treatment of short positions is discussed in paragraph 7.28. Fees payable to one of the parties under a reverse transaction are discussed in paragraphs 11.67–11.68.

4. Overnight deposits

7.62 Overnight deposits (or sweep accounts) involve funds that are moved back and forth overnight. In some cases, these overnight accounts are held in another economy. The funds are returned at the beginning of the next working day and may then be moved back at the close of business. Positions should be measured after funds are moved at the end of the day. The calculation of major statistical aggregates—including external asset and liability positions and financial transactions—can differ substantially depending on whether they are measured before, or after, funds are moved. By measuring positions and transactions after the funds have been moved, consistency is ensured between the measure of interest flows and of positions. In addition, major data users are interested in the size and location of these stocks and flows for risk assessment and other purposes.

5. Insurance technical reserves, pension and annuity entitlements, and standardized guarantees reserves

7.63 These reserves include:

1. prepayment of premiums and reserves for outstanding claims for nonlife insurance (both reported claims and for claims incurred and not reported). Equalization reserves (explained further in paragraph 5.64(b)) for events that have occurred are included, whereas reserves for events that have not occurred are excluded;

2. entitlements of beneficiaries under life insurance policies and pension schemes; and

3. provisions for calls under standardized guarantees.

7.64 Insurance technical reserves are regarded as liabilities of the insurance companies and assets of the policyholders and beneficiaries. For economies that are major insurance service exporters or importers, cross-border insurance reserves may be significant. For economies that are major sources or destinations of temporary workers or that are sources or destinations for retirees who change residence, life insurance and pension entitlements may be important elements of the IIP. Insurance technical reserves may be classified as direct investment in the cases discussed in paragraph 6.27.

7.65 The nature of the pension entitlements liabilities of the pension fund and the corresponding asset of the beneficiaries depend on the nature of the pension plan:

1. A defined contribution scheme is one in which the benefits are defined exclusively in terms of the level of the fund built up from the contributions made over the employee’s working life and the increases in value that result from the investment of these funds by the manager of the pension scheme. The entire risk of the scheme to provide an adequate income in retirement is thus borne by the employee. The liability of a defined contribution fund, and the corresponding assets of the beneficiaries, are equal to the current market value of the assets of the fund, including any claims on the employer. Defined contribution plans are always funded.

2. A defined benefit scheme is one in which the benefits payable to the employee on retirement are determined by the use of a formula, either alone or as a minimum amount payable. The liability of a defined benefit scheme, and the corresponding assets of the beneficiaries, are equal to the present value of the promised benefits. In defined benefit schemes, benefits to the policy-holder are guaranteed, but the scheme may be funded or unfunded.

7.66 The calculation of the value of pension entitlements may be direct or actuarial. Obligations of unfunded pension schemes are recognized as liabilities, based on actuarial estimates of the accrued liability to beneficiaries under the scheme. Potential payments by social security schemes are not recognized as financial assets or liabilities. (See paragraphs 5.66–5.67 for more detail about pension entitlements as a financial instrument.)

7.67 Provisions for calls under standardized guarantees are calculated in a similar way as described for nonlife insurance technical reserves. They are equal to the present value of expected calls under outstanding guarantees, net of any recoveries the guarantor expects to receive from the defaulting parties.⁵

7.68 To the extent that these reserves, entitlements, and provisions are measured from the accounts of insurance companies, pension schemes, and issuers of standardized guarantees, they may need to be split between liabilities to residents and nonresidents according to a suitable indicator such as premiums payable. The priority attached to the estimation of cross-border proportions of insurance reserves depends on their significance in each economy.