FDI positions are the value of FDI assets and liabilities at a specific point in time. FDI equity positions cover all components of shareholders’ funds. The equity position in a directly held direct investment enterprise should reflect the equity held down the ownership chain. The conceptually correct valuation of FDI equity positions is market value. However, because so much equity in direct investment is unlisted, it is necessary for compilers to estimate the market value; there are three preferred methods to estimate the market value of unlisted equity: recent transaction price, own funds at book value, and the market capitalisation method, FDI debt positions include payables and receivables between enterprises in a direct investment relationship arising from loans, deposits, debt securities, suppliers’ (trade) credit, financial leases, and non-participating preference (preferred) shares. Nominal values are used as a proxy for market value for all debt positions other than debt securities.
OECD Benchmark Definition of Foreign Direct Investment (Fifth Edition)
Abstract
256. This chapter describes the direct investment position account. It covers the breakdown of foreign direct investment (FDI) positions between equity and debt. This is followed by a discussion of issues around the valuation of FDI equity. Because much of the equity in FDI is unlisted, there is not a readily available market value; in such cases, compilers must estimate the market value. Different methods to estimate the market value are briefly discussed in this chapter. Finally, some issues with basing the valuation on financial accounting data are described.
257. FDI positions are the levels of FDI assets and liabilities at a particular point in time.1 FDI positions are disaggregated into equity and debt instruments; the accumulation of reinvestment of earnings (or the closing balance of retained earnings in proportion to the equity held) is not recorded separately in positions data as it is included in the overall calculation of “equity” when recorded at market value.
4.2.1. Equity positions
258. Equity positions cover all components of shareholders’ funds (proportionate to the percentage of shares held). They, therefore, include equity, contributed surplus, reinvestment of earnings, revaluations, as well as any reserve accounts. Reinvested earnings/reinvestment of earnings apply only between a direct investment enterprise (DIE) and its immediate direct investor. Reinvestment of earnings is not recorded for either reverse investment or for investment between fellow enterprises where neither party holds 10% or more of the voting power in the other. The reason for not imputing reinvested earnings/reinvestment of earnings in these cases is that, as these parties do not have at least 10% of voting power in the other, none of them can exert influence over the earnings distribution policy of the enterprise.2
259. As noted earlier, equity positions may arise from reverse investment that occurs when a DIE acquires an equity claim on its direct investor without holding 10% or more of the voting power. In addition, as stated above, equity assets and liabilities arising from reverse investment consist solely of equity capital, i.e., reinvestment of earnings is excluded when the level of the equity investment is less than 10% of the voting securities of the direct investor. This exclusion would apply only if equity investment is recorded at book value. Since the Benchmark Definition recommends market value as the valuation of FDI positions, in principle this differentiation does not apply.3
260. In instances where a DIE, holding less than 10% of the voting power in its direct investor, increases that voting power to 10% or more, the DIE becomes, in its own right, a direct investor and a separate direct investment relationship is established with its direct investor. Similarly, when a fellow enterprise, holding less than 10% of the voting power in a non-resident fellow enterprise, increases that voting power to 10% or more, the acquiring enterprise becomes a direct investor in the foreign affiliate. How these transactions and the related changes in FDI positions are to be recorded is discussed further in Chapter 5.
261. It should therefore be emphasised that where a resident DIE acquires a 10% or more voting power interest in its direct investor or in a fellow enterprise resident in a different economy, it is not treated as reverse (equity) investment in the first case but rather as a direct investment asset in both cases, as the threshold of 10% of voting power has been reached to create a direct investor. Similarly, where a FDI enterprise holds 10% or more of the voting power of the resident direct investor, or in fellow enterprises resident in different economies than itself, the investment should be recorded as direct investment liabilities by the economies receiving the investment, as, by reaching 10% of the voting power in the resident enterprise, the non-resident enterprise itself becomes a direct investor.
4.2.2. Debt instruments positions
262. Inter-company accounts should be separately recorded for assets and liabilities. Debt positions include payables and receivables between enterprises in a direct investment relationship arising from loans, deposits, debt securities, suppliers’ (trade) credit, financial leases, and non-participating preference (preferred) shares.4 However, debt positions between FDI-related financial intermediaries (such as commercial banks, savings institutions, credit unions, mutual funds or finance companies) are excluded from direct investment (though this exclusion does not apply if one of the parties is a holding company). The reason for this is that they are taken to represent “normal banking-type business”, so that their very nature is quite different from that of other DIEs. Consequently, it is felt that the inclusion of debt instruments between such related financial intermediaries would produce misleading results.
4.2.3. Positions along a chain of related direct investment enterprises
263. As discussed in Section 2.4.3 on the framework for direct investment relationships (FDIR), many direct investors own their DIEs through complex ownership chains. The equity position in a directly held DIE should reflect the equity held down the ownership chain. Figure 4.1 presents a simple multinational enterprise (MNE) structure consisting of five different enterprises in four different economies; A (in Economy 1) is the ultimate controlling parent (UCP), and it owns B and C directly and D and E indirectly. For each entity in each economy, the figure shows an abridged balance sheet consisting of total assets (with the equity investment in foreign affiliates broken out), total liabilities and owners' equity. The figure also shows the ownership chains and the percentage of ownership.
Note: All values are in USD.
264. Table 4.1 shows the inward and outward FDI positions that would be recorded under the directional principle by the immediate partner economy. While Economy 1 would only record outward FDI positions with economies 2 and 3, the DIEs B and C would reflect the equity they hold in economy 4 (in DIEs D and E). Under the directional principle, the loan between fellow enterprises B and C is treated as a reduction in inward investment in B as the funds that flowed into economy 2 from the fellow enterprises' common direct investor (enterprise A) have flowed to another economy (economy 3). This loan does not give B any influence over the operations of C, and, so, should not be recorded as an outward investment. However, because it is recorded against the immediate partner economy, it does lead to an asymmetry in the bilateral inward and outward FDI positions reported by the two countries.
265. These complex ownership chains pose difficulties for both compilation and interpretability of FDI statistics and will be discussed further in Chapter 6 and Annex 6.D on pass-through funds.
Note: All values are in USD.
4.2.4. FDI positions according to the asset/liability and the directional principles
266. Just as for FDI financial transactions and income, FDI positions can be recorded according to either the asset/liability or directional presentation. Under the asset/liability presentation, direct investment positions should be shown separately for assets and for liabilities. The presentation of outward foreign direct investment positions is different to that of foreign direct investment assets, and the presentation for inward foreign direct investment positions is different to that for foreign direct investment liabilities. These differences essentially involve transposing reverse positions and positions between fellow enterprises in the two presentations so that the directional presentation shows results from the perspective of the home economy of the parent company (see Annex 2.B). FDI asset positions under the asset/liability principle are (generally) greater than FDI outward positions calculated according to the directional principle. In the same manner, FDI liability positions under the asset/liability principle are (generally) greater than the FDI inward positions calculated according to the directional principle.
4.3.1. Valuation of FDI equity positions
267. As discussed in Section 2.5.2, market prices are the appropriate principle for valuation of position data. However, there may be no observable market prices for positions in equity not listed on stock exchanges. Therefore, compilers must estimate market values in these cases.
268. The methodological guidance for the valuation of direct investment in the Benchmark Definition reflects the synthesis of three fundamental goals:
1. to use market value as the preferred conceptual basis for measuring all positions and transactions
2. to provide practical guidance to enable compilers to implement the recommendations in ways that are not unduly burdensome or costly
3. to facilitate the compilation of statistics that are comparable across economies.
269. Market valuation places all assets at current prices rather than when last purchased or re-valued and promotes consistency in the value of assets of different vintages. It also promotes consistency when comparing positions, transactions and other flows of different enterprises, industries, and economies. However, it is accepted that sometimes compromises may have to be made between pure concepts and other goals such as those of practicality and comparability.
270. Although market value is the recommended basis for valuation, it is recognised that, in practice, values based on the books of DIEs (or investors) are often used to determine the values of direct investment positions. This is because enterprise balance sheet values – whether they are regularly re-valued on a current value basis, reported on a historical cost basis, or reported on some other basis – may represent the only source of information on valuation available in many economies, particularly for unlisted shares. However, the collection of data from enterprises on a current market value basis is strongly encouraged whenever feasible.
271. When valuing equity positions, a distinction is made between the valuation of listed equity and unlisted equity. This is because listing on an organised stock market provides a good basis for calculating the market value of equity, while, in many cases, an approximation will be necessary for unlisted equity. In either case, if there has been a material change in the financial position of an enterprise since the date to which the valuation applies (up to and including the reference date), an adjustment may have to be made. Examples of such material events may include an unexpected decision in a lawsuit, credit downgrade or upgrade, major new invention or mineral discovery, or bankruptcy.
272. Although some methods are not recommended as endpoints in valuing direct investment equity for the main accounts, they may nonetheless serve as appropriate starting points. Indeed, such methods may serve as the only basis upon which information can be collected from direct investors and DIEs.
273. For economies that begin their valuation process via the collection of book value5 information, the books of the DIE should serve as the starting point. The books of the DIE are usually more comprehensive than those of the direct investor. This is because, under tax and financial accounting rules followed by most economies, the books of the DIE will typically reflect current period earnings, from which retained earnings can be readily derived. Availability of DIE accounting data, therefore, facilitates the compilation of inward direct investment. In contrast, the books of direct investors may not reflect the current period earnings of their DIEs; particularly in the case where these DIEs are not majority owned (this investment is sometimes carried at cost on the investor’s books). Such shortcomings can have an adverse impact on the compilation of outward direct investment.
274. The discussion on the valuation of direct investment equity positions focuses on methods that may be used to value quoted shares, unquoted shares, and equity in unincorporated enterprises (including joint ventures and branches) at market values.
Listed (or quoted) shares
275. Listed (or quoted) shares are equity securities that are listed on an organised stock exchange. Their values can, therefore, be determined by multiplying the number of shares held by the direct investor(s) by the most recent bid/ask prices or at the price at which the shares were last traded. In this manner, a market price value of the holdings of the shares held by the direct investor(s) – and thus the value of the share liability of the DIE to its direct investor(s) – can be determined. Usually, the equity securities of only a relatively small proportion of DIEs are publicly traded on organised stock exchanges because most DIEs are either 100% owned by the direct investor or are held by a small group of investors.
276. Compilers should estimate the market value of listed DIEs by using the mid-point between the most recent bid and ask prices, or by using the prices at which the quoted shares were last traded on the stock exchange relative to the reference period. The use of actual market prices guarantees that each share in a given company is valued at the same price, regardless of the extent of the ownership of shares by the direct investor.
Unlisted (or unquoted) shares
277. Unlisted (or unquoted) shares represent equity not listed on an organised or public stock exchange. By their nature, a market valuation estimate is not regularly available for unlisted equity and an approximation to the market value is required to measure direct investment. Several methods, three of which are preferred, to proxy market value are acceptable and are discussed in detail in Annex 4.A.
278. In practice, the choice of the method to be used by a compiler will depend on four factors:
1. the type of information available on which to base an approximation
2. how well the method approximates market value
3. the need to allow for comparability across economies and for symmetrical recording by creditors and debtors
4. practicality of implementation.
279. In most cases, these arguments are also applicable to the valuation of equity in unincorporated DIEs. To assist users, compilers should state clearly the method(s) they employ in compiling their FDI statistics at the aggregate level.
280. While flexibility in valuing unquoted equity is recommended, the Benchmark Definition follows the 2025 System of National Accounts (2025 SNA, (United Nations et al., Forthcoming[1])) and the Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[2]), Chapter 7, Section B.1, paragraphs 7.15–7.17), in recommending three preferred methods to approximate the market value of unlisted equity positions; these methods are most widely used in practice. The goal of identifying preferred methods is to enhance international comparability and to reduce bilateral asymmetries resulting from differences in national practices for valuing unlisted equity. These preferred methods are:
recent transaction price
own funds at book value
market capitalisation.
The above three preferred methods, as well as additional methods, though not preferred, to estimate market value (i.e., net asset value, price to earnings ratio, and apportioning global value) are described in Annex 4.A. In addition, Annex 4.A includes a decision tree to help clarify for compilers the methods available for the valuation of unlisted equity given the information available to them.
281. There are other valuation methods not recommended by this Benchmark Definition even though they may be the only methods available to compilers due to the sources of information accessible to them. They could only serve as a starting point to collect FDI equity data and are not recommended as a proxy to market value. These are the following:
historic or acquisition cost
accumulation of foreign direct investment equity capital transactions
stock market price index applied to accumulated direct investment equity capital flows
book value.
These methods are also briefly described in Annex 4.A.
Equity in unincorporated enterprises (including branches)
282. As noted, the above discussion of unlisted shares is also applicable to the equity in unincorporated DIEs (including branches, unincorporated joint ventures, and limited liability partnerships). 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 non-residents (this method would mean that quasi-corporations have no residual net worth). Alternatively, equity in quasi-corporations may be valued using one of the three preferred methods discussed above. Compilers should clearly state in their methodologies what major assumptions and methods they apply in developing estimates of direct investment equity positions.
Reconciling financial and economic accounting valuations of equity
283. In practice, own funds at book value (OFBV) is the most widely used method to value unlisted equity in direct investment. In addition, it is often the base for the market capitalisation method. OFBV values the enterprise at the value appearing in the books of the DIE according to international accounting standards (IAS). The reliance on financial accounting can lead to issues in the compilation and interpretation of equity positions.
284. One issue, as discussed in FDI income (Section 3.3), is the treatment of loan loss provisions. In macroeconomic accounting, loan loss provisions are not treated as liabilities and because they are not subject to the sort of (legal) contract associated with a liability (BPM7, Chapter 7, Section E.1, paragraph 7.54). Even though provisions more generally may be earmarked for specific purposes, the amounts designated as provisions remain part of the net worth of the corporation (2025 SNA, Chapter 14), and, therefore, the provisions remain in the equity value of the corporation. In corporate accounting, the provision is recorded as a liability in the balance sheet and the counterpart is recorded as an expense in the profit and loss account, both identified as provisions and possibly with a description of the nature of the underlying transaction. In the financial sector, provisions may not be recorded as a liability but as a reduction of the corresponding asset and covered by a loss, implying a reduction of the equity capital. Under some financial accounting standards, such as international financial reporting standard (IFRS) 9, provisions may impact the valuation of the enterprise. While OFBV is mostly calculated as the sum of items such as paid-up capital, all types of reserves, and the value of undistributed profits, provisions are not directly included in this sum; however, recognition of any provisions, including for loan losses (at least for non-financial corporations) may lead to changes in some of these items through the profit and loss statement. For the financial corporations, especially banks, the OFBV valuation is also impacted due to the reduction in equity capital due to the different accounting approaches.
285. Despite the possibility that changes in provisions could impact the OFBV valuation of the enterprise, this Benchmark Definition recommends that compilers do not make any adjustments to the OFBV valuation for the treatment of provisions. This recommendation is completely consistent with the method that calls for using the values appearing in the books of the DIE under IAS. Rather, the impact of changes in provisions would be reflected in revaluations. This is consistent with the valuation of unlisted equity which, for example, recommends calculating the value of the equity in quasi-corporations as the balance of assets less liabilities and, thus, calculating the holding gains as the sum of holding gains on assets less the holding gains on liabilities. This recommendation also helps to preserve one of the advantages of the OFBV valuation—that it is thought to minimise bilateral asymmetries because compilers in counterpart economies use the same information to value unlisted equity; the introduction of adjustments could possibly introduce asymmetries due to compilers in different economies using different adjustments. Finally, it must be noted that this issue is not widespread across industries but more pronounced in some industries, such as financial intermediaries.
286. For many types of special purpose entities (SPEs), it would be expected that the value of their assets and liabilities should balance out.6 However, when applying OFBV method, this is not always the case because the SPE’s assets are valued according to the accounting standards of the economy of residence of the affiliates it holds while the SPE’s liabilities are valued using the books of the SPE itself. Hence, the values of the SPE’s assets and liabilities are different while they should, in theory, be equal. These differing valuations will have an impact on the economy’s net international investment position while it would be expected that the impact of hosting SPEs would be neutral for the economy’s net international investment position. Therefore, to align the value of the SPE’s assets and liabilities from the compilers’ perspective in an economy hosting SPEs, either the SPE’s liabilities should be valued using the value of the SPE’s assets or the SPE’s assets should be valued using the SPE’s liabilities. However, this can lead to bilateral asymmetries between the economy hosting the SPE and the economy of residence of the direct investor of the SPE. Therefore, adjustments to the valuation of SPEs should be shared with compilers in counterpart economies to the extent possible under confidentiality and resource constraints to mitigate bilateral asymmetries.
287. OFBV can result in negative equity positions, which simply means that the enterprise’s liabilities exceed its assets. This can result from the nature of financial accounting, which values assets conservatively and omits certain types of intangible assets, such as brands, that can contribute greatly to the valuation of an enterprise. Negative equity can also result from the financing decisions of the direct investors, such as a preference for debt financing over equity financing for a particular DIE, or strategic decisions, such as the decision to maintain an unprofitable affiliate to gain market share or facilitate transfer pricing. Negative equity is clearly reasonable and should be recorded in the case of unlimited liability entities because the owner can be held legally responsible for the debts of their DIEs.
288. In the case of limited liability enterprises, if negative equity is reported, it should be recorded as the default. The only exception is for cases where the compiler knows that the direct investor’s liability is strictly limited. This recognises that there are cases in direct investment where the direct investor would be expected to pay the debts of its DIE. This includes when the direct investor has a formal responsibility to cover the debts of its DIE due to legal obligations, bilateral arrangements with the authorities, or following decisions of the tax authorities. It is also recognised that when the negative equity results from loans provided by the direct investor, it makes sense to record negative equity (up to the amount of loans provided by shareholders) when the shareholders would be subject to loan losses in case of bankruptcy. Finally, it is recognised that the direct investor may assume the liabilities of its DIE for reputational reasons; for example, a direct investor may cover the debt obligations of its DIE to avoid paying higher borrowing costs in the future (BPM7, Chapter 7, Section B.1, Box 7.1). To provide operational guidance for compilers to determine when reputational risk exists, the statistical manuals generally assume that significant reputational risks exist when a shareholder’s ownership share is at least 10%; that is, all direct investors are assumed to face reputational risks.
4.3.2. Debt instruments positions
289. While the basic principle is that the market value of debt should be used, international standards recommend the use of nominal values as a proxy for market value for all debt positions other than debt securities for pragmatic reasons.7 The use of nominal values in valuing direct investment loans is consistent with international standards for valuation of loans with parties related under the FDIR. The Benchmark Definition recommends that the values of all debt outstanding be inclusive of accrued interest, with foreign currency debt converted to the national currency using the rate of exchange (mid-point of the buy and sell rates) at the close of business on the reference date. The use of nominal values is partly influenced by pragmatic concerns about data availability and the need to maintain symmetry between debtors and creditors. In addition, because loans are not intended to be negotiable and do not have an active market, a market price can be somewhat subjective. Nominal value is also useful because it shows actual legal liability and the starting point of creditor recovery behaviour. In some instances, loans may also be traded, often at discount, or a fair value may exist or would be possible to estimate. It is recognised that nominal value provides an incomplete view of the financial position, particularly when the loans are impaired. Therefore, supplementary information on the fair value of the claims in loans is useful if it is available.
References
[2] IMF (Forthcoming), Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7), International Monetary Fund, Washington D.C.
[1] United Nations et al. (Forthcoming), 2025 System of National Accounts, United Nations et al., New York.
290. The underlying principle for the valuation of equity is the market value of that equity. Listing in an organised stock exchange market provides a good basis for valuing listed equity. However, it can be more difficult to determine a market value for unlisted equity and illiquid listed equity. In any case, if there has been a material change in an enterprise's financial position since the date to which the valuation applies (but before the reference date), an adjustment may need to be made. Examples of such material events include an unexpected decision in a lawsuit, credit downgrade or upgrade, major new invention or mineral find, or bankruptcy.
291. This manual recognises three preferred methods for approximating market value for unlisted equity:
recent transaction price
own funds at book value (OFBV)
market capitalisation method.
The reason for identifying preferred methods is to mitigate bilateral asymmetries arising solely from the use of different valuation methods by compilers in different economies.
292. The choice of the method depends primarily on having sufficient information available to apply the method but also how well the method approximates market value, that it results in comparable estimates between counterpart economies and simplicity in application. In choosing a method, compilers need to consider the trade-offs between methods that might mitigate asymmetries, like OFBV, and those that might produce a better approximation to market value, like the market capitalisation method. In practice, one or more of these methods could be ruled out because of a lack of information available to apply them. Among the methods that could be implemented, the primary consideration should be how well the method approximates market value. A further consideration is the stringency of the requirement for symmetric recording by debtors and creditors.
293. Each method is described in more detail in the section below, giving information on what is needed to apply the method and caveats on its use. This is followed by a section describing other methods that can produce good approximations of market value but that are not among those identified as preferred because they tend to be used less often due to the type of information required. Next, methods that are specifically not recommended in this Benchmark Definition are described. Finally, a decision tree to help compilers determine the methods available to value unlisted equity is presented.
Recent transaction price
294. Unlisted equity may trade from time to time, and recent prices at which the equity exchanged hands may be used. The transaction price must represent an “arm's length” price between an independent buyer and seller, where neither party is under compulsion or duress to engage in the transaction. More recent transactions are preferable, and it is desirable that the transaction should have occurred within the past year. If the most recent transaction is more than one year old, compilers may wish to consider an alternative method.
Usage: a recent, arm's length transaction price is required.
Caveats: not often available due to the low frequency of trades in unlisted equity. When a transaction price has been used in the past to value the equity, but the information is becoming dated, a strategy is required to splice the valuation with a valuation calculated from another method.
Own funds at book value
295. OFBV involves valuing an enterprise at the value appearing in its books following international accounting standards (IAS). OFBV is based on the books of the direct investment enterprise (DIE) and can be seen on its balance sheet as shareholder’s equity. The definition of OFBV contains paid-up capital, all types of reserves and net value of non-distributed profits and losses (including results for the current year). IAS require most assets to be revalued, at least, on an annual basis. A capitalisation ratio may be calculated and applied (with or without liquidity adjustments) if sufficient information is available (see Section “Market capitalisation method” below).
296. In some cases, the books of the DIE are recorded according to a national generally accepted accounting principles (GAAP) rather than the IAS. If the national GAAP used is closely aligned with the IAS regarding the valuation of enterprises, then these valuations should be close to the OFBV valuation based on the IAS.
Usage: this method may be used where books are kept on the basis of IAS (or a national GAAP closely aligned with IAS regarding the valuation of enterprises), and access is available to the books of the DIE.
Caveats: IAS prohibit the recognition of certain intangible assets (e.g., brands, mastheads, publishing titles, customer lists). Goodwill can only be bought; it cannot be internally generated. Moreover, intangible assets that are booked on the balance sheet may be recorded at historical costs, which may be far from a fair representation of their current market value. Assets in some asset classes (loans, assets held to maturity and non-trading liabilities) may be valued at nominal or historic cost. These will all cause distortion from the market valuation.
297. The issues with intangible assets could be even greater under some national GAAP that could diverge from the IAS in recognising intangible assets and for some types of companies, such as start-ups that are undertaking research and development (R&D) but may not yet have sales. In addition, the valuation of real estate under some national GAAP may not represent its market value if it requires more conservative valuation methods than IAS.
298. To address the shortcoming of the OFBV with regards to certain types of intangible assets and real estate, an item on the development of an enhanced OFBV method that would adjust OFBV with market estimates of intangible assets and real estate when available has been added to the research agenda (Annex D). In addition, application of a well-based market capitalisation ratio (discussed next) may dampen the impact of the caveats of the OFBV method.
Market capitalisation method (price to book ratio)
299. This method proposes the use of a capitalisation ratio as the ratio of the stock exchange market capitalisation to “own funds at book value” calculated for the same set of listed companies; it is recommended to calculate market capitalisation ratios by industry groups because the ratios likely vary systematically across different industries. In constructing the capitalisation ratio under this method, stock market data for an individual country may be used when the stock market in that country is broad and the trading volume is relatively high; broad regional indices should be used when these circumstances do not exist. The estimate of market values of direct investment equity in unlisted companies is calculated by multiplying own funds at book value (owners’ equity) of unlisted DIEs by the capitalisation ratio (that is, by the stock exchange market capitalisation [numerator] to the own funds at book value of listed companies [denominator]). The market capitalisation ratios can be applied at the company-by-company level or to the aggregate book value of equity in unlisted companies in an industry.
300. Capitalisation ratios developed from broad stock exchange data should be adjusted, or individual ratios should be developed for separate industry groups, if the industries represented in the stock exchange for a given economy are not representative of the industry mix of DIEs located in the same economy. Book values that are based on another set of accounting standards – such as the United States generally accepted accounting principles (US GAAP) – that contain major attributes of IAS (inclusion of cumulative reinvested earnings; revaluation of financial instruments in current period prices; and inclusion of cumulative depreciation of plant and equipment, including write-offs of worthless assets) may also be used with the capitalisation ratio method.
Usage: useful exercise if the overall enterprises listed in the stock exchange are good representatives of the national industry.
Caveats: For inward positions, some very large local foreign direct investment unlisted enterprises might represent almost the entire industry. Another strategy is then required to better reflect the market valuation of that enterprise. For outward positions, it would be necessary to develop the ratios from information on foreign stock exchange indices for several countries. For both inward and outward positions, some other considerations could be seen as caveats of this method; for example, some specialists question the assumption that quoted and non-quoted companies should use the same ratio to own funds. Being quoted in a public market means that a company has to comply with more strict rules, provide more detailed information to market participants, etc. Moreover, a liquid asset (quoted shares) may have a higher value from being liquid. Finally, calculation of capitalisation ratios requires a reasonably broad stock market with high trading volume.
301. Further research on the market capitalisation method is included in the research agenda (Annex D). First, it suggests the development of an international database of market capitalisation ratios to assist compilers in its application and to mitigate bilateral asymmetries. Second, the development of liquidity discount rates is included in recognition that listed shares should be more valuable than unlisted shares because they are highly liquid assets.
302. This Benchmark Definition recognises additional methods that yield good approximations to market value but are not among the preferred methods largely because the information to implement them is often not available. These methods are:
net asset value (NAV)
including goodwill and intangibles
excluding goodwill and intangibles
present value/price to earnings ratio
apportioning global value.
Net asset value (NAV), including goodwill and identified intangibles
303. Net asset value (NAV) is total assets at current value less total liabilities (excluding equity) at market value. Under this valuation method, all financial and non-financial assets and liabilities of the enterprise, including intangible assets, are stated in terms of current period prices. The valuations should be based on very recent appraisals – they must be within the prior year. Appraisals may be conducted by knowledgeable management or directors of the company, and/or provided by independent appraisers. A capitalisation ratio may be calculated and applied (with or without liquidity adjustments) if sufficient information is available (see market capitalisation method).
Usage: at a minimum, this method requires an asset and liability valuation to be undertaken by the enterprise.
Caveats: NAV provided by an enterprise may exclude some classes of assets (e.g., intangibles), while other assets may be valued using a method that is a distortion from the current market value (e.g., historic cost or nominal value). To the extent that valuations are poor or assets are excluded from the NAV, this method can be a poor approximation of market value and other methods may be more appropriate. Collecting data needed to implement the NAV may also be difficult, requiring the adaptation of existing FDI surveys. The calculation of capitalisation ratios requires a reasonably broad stock market with high trading volume.
Net asset value (NAV), excluding goodwill and identified intangibles
304. Under this valuation method, all financial and non-financial assets and liabilities of the enterprise, excluding intangible assets, are stated in terms of current period prices. The valuations should be based on very recent appraisals – they must be within the prior year. Appraisals may be conducted by knowledgeable management or directors of the company, and/or provided by independent appraisers.
305. Note that the difference between this method, and the one immediately above, is that this method excludes, whereas the earlier discussed method includes, goodwill and identified intangibles. However, it is often very difficult to estimate the value of these assets. Compilers who can develop relatively accurate estimates of unquoted equity that include goodwill and identified intangibles are encouraged to do so. This promotes consistency between the estimates for quoted shares (these shares trade at prices that reflect the value of intangible assets) and the estimates for unquoted shares.
Usage: Compilers who cannot accurately provide estimates that include goodwill and identified intangibles may use this method.
Caveat: Goodwill and intangible assets may account for much or most of the current value of many DIEs. This valuation might not be representative of market value.
Present value / price to earnings ratio
306. The value of unlisted equity can be estimated as the present value of the forecast stream of future earnings. This method has at its heart the issue of choosing an appropriate discount rate, which can be inferred from the implicit discount rate obtained for listed equity, and forecasting the 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. In this case, the recent past earnings are used as the basis to forecast the future earnings, and the market price-to-earnings ratio implies the discount rate.
Usage: this method is most appropriate where there is a paucity of balance sheet information, but earnings data are more readily available. It also requires an appropriate discount rate or reasonably broad-based price-to-earnings ratio to be calculated.
Caveats: earnings for an individual enterprise can have a highly irregular component and can be negative (leading to negative equity valuations). As a result, if earnings information over a longer period of time is available, the earnings of the enterprise should be smoothed. If earnings for only one period are available or discount rates or price-to-earnings ratios are based on a narrow market, other methods are preferable.
Apportioning global value
307. If the equity in a particular DIE is unlisted, but the enterprise belongs to a global enterprise group whose equity is listed, the current market value of the global enterprise group can be calculated and apportioned to the operations in each economic territory. The current market value of the global enterprise group should be based on its market price on the stock exchange on which it is traded, and the apportionment of this value to each economic territory should be based on an appropriate indicator (e.g., sales, net income, assets or employment).
Usage: current market capitalisation of the global enterprise group is required. As such, this method may only be feasible for outward investment. An indicator that is well-correlated with market value and readily available is also necessary. This is more likely to occur in enterprise groups that are horizontally integrated.
Caveats: weaknesses in the correlation between market value of equity and the variable used for apportioning the global value will lead to distortions – sensitivity to the distortion is greatest when the proportion allocated to an economic territory is small or when different activities take place in different economic territories. In this case, other methods are preferable. The use for outward investment only may lead to asymmetries in bilateral comparisons.
308. As stated in Chapter 4, there are other methods to value equity that are not recommended by the Benchmark Definition, however, they may be the only methods available to compilers from the information available to them. These methods include:
historic or acquisition cost
accumulation of foreign direct investment equity capital transactions
stock market price index applied to accumulated direct investment equity capital transactions
book value.
These are briefly described below.
Historic or acquisition cost
309. Historic cost as defined here represents the original cost of purchasing a DIE, and acquisition cost represents an enterprise’s original cost for acquiring major assets and liabilities. These costs are usually based on the books of the investor, and may not reflect cumulative reinvested earnings, current period charges for depreciation, foreign currency exchange rate changes, or the impact of other economic events that may have resulted in substantial changes in the value of DIEs since their initial establishment or acquisition.
Accumulation of foreign direct investment equity capital transactions
310. Direct investment equity positions could be compiled by accumulating (or summing) direct investment equity capital transactions, and perhaps adjusting this amount for changes in foreign currency exchange rates. This method is not recommended as it does not take account of cumulative reinvested earnings, depreciation on fixed assets, DIE holding gains or losses, and other factors that often will have a substantial impact on current period values of direct investment equity.
Stock market price index applied to accumulated direct investment equity capital transactions
311. Direct investment equity positions could be compiled by accumulating direct investment equity capital transactions, adjusted as appropriate for changes in foreign currency exchange rates, and then applying changes in a related stock market price index to this amount. Under this method, changes in stock market indices for large countries or broad regions would be applied to the direct investment equity position. Country indices would be used when stock markets in the individual country are broad and the trading volume is relatively high; broad regional indices would be used when these circumstances do not exist.
312. This method is similar to “accumulation of foreign direct investment equity capital transactions”, except that it includes an adjustment for changes in stock market price indices. This method is not recommended as it does not take account of depreciation of fixed assets, DIE holding gains or losses, and other factors that often will have a substantial impact on current period values of direct investment equity. In fairness, this method does take account of cumulative reinvested earnings to some extent, because a stock market price index will tend to rise due to reinvestment of earnings by companies included in the index. However, the earnings and reinvested earnings of companies in the index may be poorly correlated with the earnings and reinvested earnings of DIEs.
Book value
313. Book value is a term that broadly encompasses many different accounting methods. It represents the values that appear on someone’s books. It could represent the values on the books of direct investors or on the books of DIEs. In fact, in common usage, the term may encompass any of the valuation methods described in this annex, whether or not recommended for use in the main accounts.
314. For countries that begin their valuation process via the collection of book value information, the Benchmark Definition recommends that the books of the DIE serve as the starting point. International comparability of direct investment earnings and direct investment positions is only possible if both the investing and host countries use the same set of books as their starting point for deriving estimates of market values.
315. The books of the DIE are usually more comprehensive than those of the direct investor. This is because, under tax and financial accounting rules followed by most countries, the books of the DIE will typically reflect current period earnings and reinvested earnings. In contrast, the books of direct investors may not reflect the current period earnings or reinvested earnings of their DIEs, particularly in the case where ownership interests are less than 20% (because this type of investment is frequently carried at cost on the investor’s books).
316. Annex Figure 4.A.1 presents a decision tree to clarify for compilers the methods available to value unlisted equity depending on the information available to them. The decision tree focuses on the valuation of a single company since that is the basis for valuing unlisted equity. The decision tree encourages the use of the three preferred methods for valuing unlisted equity when information is available (these methods are in the green boxes in the decision tree) but does recognise that one of the other methods may be more appropriate given information available to the compiler (these methods are in the orange boxes).
317. While the decision tree provides valuable guidance to compilers in selecting a method to value unlisted equity, its use should be flexible to allow compilers to select a method that best represents economic reality in the specific circumstances of their economy.
318. The decision tree, first, indicates that if a recent transaction price exists, then, it equals market price by definition at the time of transaction (except for a potential control premium to deal with), so it is a value that one may want to favour. If this method is used, the question of the duration of its use arises as well as the transition to other valuation methods.
319. In other cases, the decision tree recognises the possibility of using specific methods (which cannot be extended to all unlisted companies) if data are of good quality and relevant. By order (on the right-hand side of the tree), it is possible to use:
Net asset value, even if it is rare in practice to have such an estimate
Apportioning global value if the entity is part of a listed group and if an apportioned valuation of the group can be applied in a pertinent way (with an appropriate apportioning indicator)
Price to earnings ratio can be used if the compiler has both data on comparable listed companies as well as earnings data, including good projections of earnings, but it is also possible to use the market capitalisation method in this case.
320. The left side of the tree includes more widely applicable methods: market capitalisation method, OFBV, and the enhanced OFBV discussed above if market values of intangible assets and/or real estate are available.
← 1. For the level of financial assets, such as FDI, the term position is usually used while the term stock is often used for the level of non-financial assets/liabilities, e.g., the stock of fixed assets. Nevertheless, sometimes FDI positions are referred to as the stock of foreign direct investment at a point in time.
← 2. If countries are compiling the supplementary recording of reinvestment of earnings on portfolio investment discussed in the Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[2])), then reinvestment of earnings on reverse investment and between fellow enterprises would be included in that supplementary series.
← 3. While reinvestment of earnings is not included in FDI transactions for reverse equity investment and equity investment between fellow enterprises, the reinvestment of earnings would be reflected in the market value of the enterprise and, thus, would be reflected in revaluations.
← 4. Positions in derivative financial instruments are excluded because they are not considered to be part of direct investment.
← 5. Book value is a term that broadly encompasses many different accounting methods. It represents the values that appear on the books of an entity. It could represent the values on the books of direct investors or on the books of direct investment enterprises. In fact, in common usage, the term may encompass any of the valuation methods described in Annex 4.A, whether or not recommended for use in the main accounts.
← 6. See Annex 6.B for a description of the different types of SPEs.
← 7. While the basic valuation method for debt securities component of inter-company lending is market value, it could be compiled at nominal value as a supplementary item in cases where the economy is significantly impacted by direct investment (see BPM7, Chapter 7, Section B.4, paragraph 7.25).