OECD Benchmark Definition of Foreign Direct Investment (Fifth Edition)

5. Integrated FDI position statement

Abstract

The integrated foreign direct investment (FDI) position statement reconciles the opening and closing FDI positions through the accumulation accounts. The accumulation accounts consist of the financial transactions from the balance of payments and of the other changes in financial assets and liabilities account, which records revaluations and other volume changes. Direct measurement of the other changes in financial assets and liabilities account can provide information on important events affecting the value of FDI positions other than transactions and can improve the quality of positions and transactions data. Revaluations are holding gains and losses and are broken down between exchange rate changes and other price changes. Other changes in volume are changes in the value of assets or liabilities that are neither transactions nor revaluations. They include, amongst others, cancellations and write-offs of debt, uncompensated seizures, changes in functional category, and entities changing their economy of residence.

5.1. Introduction

321. A direct investment position can change due to transactions and to other changes, where other changes consist of revaluations and other changes in volume. Revaluations consist of exchange rate changes and other price changes. Exchange rate changes generally reflect the impact on the position of exposure of the instrument to a currency other than that in which the accounts are compiled. Other price changes reflect all other changes in the market value of the instrument as expressed in the compilation currency. Other changes in volume include events like debt cancellation, uncompensated seizures, and reclassifications between functional categories.

322. The other changes in financial assets and liabilities account is an important component of direct investment statistics as it allows transactions to be reconciled with positions by showing the impact on the value of the positions from events other than transactions. For example, they serve to demonstrate significant changes in the value of foreign direct investment (FDI) positions from events like the cancellation of debt, holding gains and losses, and liquidations. As such, it provides a method of validating and testing the consistency of transactions and positions. While other changes are sometimes derived residually, they should be measured directly because they are economic events that are important in their own right. In addition, it is through direct measurement of this account (and its components) that improvements to the quality of transactions and positions data are made possible.

323. This chapter begins with a discussion on reconciling the beginning and end of period positions with transactions recorded in the financial account and revaluations and other changes in volume recorded in the other changes in financial assets and liabilities account. It next discusses the definitions and concepts underlying the other changes in financial assets and liabilities account and presents several cases relevant to FDI. Finally, it discusses the implications of complex ownership chains and the recording of reinvested earnings for the other changes account. Annex 5.A provides some numerical examples of the reconciliation of changes in positions with transactions and other flows.

5.2. The integrated FDI position statement

324. FDI positions gain or lose value and appear or disappear as a result of transactions, other volume changes, and revaluations. This relationship can be expressed as the following identity:

Beginning of period position

+ Transactions during the period

+ Revaluations during the period:

Of which, due to:

• exchange rate changes and

• other price changes

+ Other changes in volume during the period

= End of period position.

This relationship applies to the positions of all functional categories included in the international investment position (IIP). Table 5.1 shows the direct investment entries in the integrated IIP statement; for the full statement, see the Integrated Balance of Payment and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[1]), Chapter 7, Section A, table 7.1). This reconciliation for direct investment, called the integrated FDI position statement, is one of the standard presentations of FDI statistics recommended in this Benchmark Definition (see Table A B.4 in Annex B). While the statement is presented according to the asset/liability principle in Table 5.1 and Table A B.4, it could also be presented according to the directional principle.

Table 5.1. Direct investment entries in the integrated IIP statement

	Beginning of period position	Accumulation accounts							End of period position
		Transactions from the balance of payments financial account	Other changes in financial assets and liabilities account
			Revaluations			Other changes in volume
			Total	Exchange rate changes	Other price changes	Total	Of which: debt cancellation and write-offs	Of which: reclassifications
Assets
Direct investment
Liabilities
Direct investment

Source: Based on IMF (Forthcoming[1]), Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7).

325. The accumulation accounts cover changes in assets and liabilities and changes in net worth (the difference for an institutional unit or group of units between its assets and liabilities). In external sector statistics, these accounts consist of the financial account and the other changes in financial assets and liabilities account.

5.3. Other changes in financial assets and liabilities account

326. The other changes in financial assets and liabilities account shows changes in financial positions that are not transactions. These changes are also called “other flows” and consist of revaluations and other changes in the volume of financial assets and liabilities.

5.3.1. Revaluation

327. Revaluations consist of holding gains and losses. They arise from changes in the monetary value of a financial asset or liability due to changes in the level of prices. As the term suggests, holding gains or losses are changes in the value of an asset that accrue purely as a result of holding assets over time without transforming them in any way. A holding gain occurs when an asset increases in value or a liability decreases in value; a holding loss occurs when an asset decreases in value or a liability increases in value. Revaluation takes into account all price changes during the period, whether realised or not. Holding gains and losses are realised when the asset is sold or the liability extinguished. Holding gains and losses on unsold assets and unpaid liabilities are unrealised but are recorded as revaluations in the other changes in financial assets and liabilities account. Common causes of revaluation for equity are changes in expectations of future incomes and, for debt securities, changes in market yields and the creditworthiness of the debtor.

328. Revaluations are separated into exchange rate changes and other price changes. These impacts should not be included in the earnings of an enterprise when calculating income transactions (see Section 3.3.2, sub-section on distributed earnings discussing the exclusion of holding gains and losses from the measurement of FDI earnings).

Exchange rate changes

329. Exchange rate changes reflect the impact that changes in exchange rates have on instruments that are denominated in a currency other than that in which the accounts are compiled. The currency of denomination of equity is generally the domestic currency of the economy in which the issuer is resident. In this case, if the accounts are compiled in the local currency, then the exchange rate changes for equity liabilities will be zero. However, when equity is issued in a currency other than the local currency, then there can be exchange rate changes even if the local currency is used to compile the accounts. Debt securities are denominated in the currency in which they are to be redeemed except in the case where the principal is indexed to another currency. When the principal of a debt security is linked to another currency, the debt security is treated as though it was denominated in that currency. In all other cases, reference should be made to the contractual arrangements of the debt position to determine in which currency it is denominated.

330. Exchange rate changes may be referred to by enterprises as realised or unrealised exchange rate or foreign exchange gains or losses.

331. It should be noted that operating revenues and expenses denominated in units of a foreign currency will also translate into different amounts, expressed in the compilation currency, solely as a result of exchange rate changes. However, these impacts should be included in direct investment earnings in the current period because they result from actual on-going operations in the current period rather than from holding gains.

332. Transactions are converted to the compilation currency at the rate prevailing when they took place, and positions are converted at the rate prevailing on the reference date. The mid-point between the buying and selling rates should be used at the time of transaction (for transactions) and at the close of business on the reference date for positions. The impacts of changes in the exchange rate on this conversion are recorded as exchange rate changes.

333. If the accounts are compiled in the local currency, and the local currency appreciates against the currency of denomination of a financial instrument, exchange rate changes will reflect a decrease in the value of the instrument in the local currency. This is the case whether the instrument is an asset or a liability.

Other price changes

334.  Other price changes reflect all changes to the market value of an instrument as expressed in the compilation currency that are not exchange rate changes or attributable to transactions. Many factors can affect the value of a direct investment enterprise, and these factors should jointly be considered other price changes on its equity. Other price changes reflect the change in the market value of an instrument in the currency in which it is denominated. This market price change is then converted to the currency of compilation and may also give rise to exchange rate changes if the exchange rate changes over the period during which the market price change occurred (see next sub-section on separating revaluations into exchange rate and other price changes).

335. There can be differences between transaction prices and the values recorded in the position data for financial instruments. One example is when a direct investor sells its direct investment enterprise (DIE) for more (or less) than the value recorded in the direct investment position. The difference can be recorded as an ‘other price change’. However, unlisted equity can sometimes be traded at values that deviate significantly from the value reflected in the position. In such cases, compilers should use all the information available to improve the quality of the estimated positions when they become aware that they are under- or over-valued by implementing backward revisions in the position according to their national revision policy.

336. External factors can influence the market value of a debt position. For example, if the credit rating of the issuer of a debt instrument is changed, then this may have an impact on the value of the debt instrument.

337. Other price changes may be recorded under any of the recommended methods for valuing unlisted equity in terms of current period prices. For example, when market prices are used for listed equity or the market capitalisation method is used for unlisted equity, an increase (decrease) in the value of equity listed on resident markets will generally be reflected as an increase (decrease) in the value of equity liabilities. Likewise, an increase (decrease) in the value of equity listed on non-resident markets will be reflected in an increase (decrease) in the value of equity assets. See Section 5.4 and Box 5.1 for more information on recording other price changes when market prices are used to value listed equity and the market capitalisation method is used to value unlisted equity.

338. Where debt positions between related enterprises are in the form of debt securities, the market value of these positions will be affected by changes in interest rates. If resident interest rates are generally increasing, this will be reflected in a decrease in the value of debt securities issued in the local economy; while if non-resident interest rates are generally increasing, this will be reflected in a decrease in the value of debt securities issued abroad. To determine the impact of these changes on the values of positions, it is necessary to understand whether debt security assets/liabilities between related enterprises are issued locally or abroad.

Separating revaluations into exchange rate and other price changes

339. It is not unusual for positions to change due to both exchange rate changes and other price changes. It is analytically useful to separate the causes of the changes in valuation.

340. For instruments denominated in a currency other than that in which the accounts are compiled, the opening position (or position at creation) is converted to the compilation currency at the exchange rate prevailing at the time, and similarly for the closing position (or position when extinguished). The difference between these two values consists of both exchange rate changes and other price changes.

341. The other price changes should be calculated in the currency of denomination. This is converted to the compilation currency using a mid-point exchange rate. The mid-point exchange rate is calculated as the mid-point between the exchange rate at the start of the period (or at the time when the position was created if this was during the period) and the exchange rate at the end of the period (or at the time when the position was extinguished if that occurred during the period).

342. The exchange rate changes can then be calculated as the difference between total valuation changes and the other price changes (for more information, see BPM7, Chapter 9, Section B.3, Box 9.1).

343. Under the international financial reporting standards (IFRS), enterprises may keep their books in a currency other than the local currency or the currency in which the accounts are compiled. The IFRS refer to this currency as the currency of account. When these enterprises report information to the compiling authority, it will need to be converted to the domestic currency (or the compilation currency). Exchange rate changes are calculated as the impact of changes in the exchange rate between the currency in which an instrument is denominated and the currency in which the accounts are compiled; other valuation changes identified during the conversion process should be recorded as price changes, regardless of movements in the exchange rates used in the conversion.

5.3.2.  Other changes in the volume of financial assets and liabilities

344. Other changes in the volume of financial assets and liabilities are changes in the value of these assets or liabilities that are neither transactions nor revaluations. They include, amongst others, economic appearance and disappearance of financial assets and liabilities1, catastrophic losses, cancellations and write-offs of debt, uncompensated seizures, reclassifications, and the changes in financial assets arising from units changing their economy of residence (BPM7, Chapter 9, Section C, paragraphs 9.7- 9.24). Because of the heterogeneous nature of other changes in volume, analysts may sometimes wish to identify the major components. While other changes in volume are part of the standard presentation, “of which” items for cancellations and write-offs of debt and reclassifications are included as supplementary items.

Debt cancellation and write-offs

345. Changes in claims resulting from debt cancellation or write-offs are treated as volume changes and are not treated as financial transactions. Specifically, a creditor may recognise that a financial claim can no longer be collected from the debtor and may remove the claim from its balance sheet. Debt cancellations and write-offs are either unilaterally determined by the creditor or by courts, arbitrators and related out-of-court settlements; unilateral cancellation of a financial claim by a debtor (debt repudiation) is not recognised.

346. Debt forgiveness and debt assumption are both treated as capital transfer transactions. Debt forgiveness usually involves the intention by the creditor to convey a benefit to the debtor. Debt assumption (including one-off guarantees) usually involves a third party with which there may be transactions.

347. Partial write-offs (write-downs) of debt assets by creditors are not considered to change the volume of financial claims of the creditor on the debtor. Partial write-offs are treated as a revaluation of the claim and are classified as other price changes. If a bankruptcy process results in all debt being written off, then the loss is recorded as a volume change; if the bankruptcy process results in even a token return to the creditor, then the debt is reduced as a valuation change with a transaction to extinguish the debt.

Liquidations and failed exploration activities

348. When a DIE is ultimately liquidated, the equity investment in the enterprise is often written off by the direct investor and removed from its balance sheet. This situation is treated as a volume change as the equity claim is considered to have disappeared. If there is a partial return to the direct investor, then this should be treated as a valuation change with a transaction to extinguish the claim.

349. In practice, the process of liquidating an enterprise can be lengthy, and, during this period, the value of the equity in the enterprise may decline due to a loss in the value of its assets. If this is the case, it should be recorded as a revaluation. A liquidator will try to sell the assets, pay the creditors, and distribute the residual amount (if any) to the shareholders. Only then, the enterprise will be removed from the legal register of active enterprises. In most cases, by the time the liquidated enterprise is officially dissolved, the value of the equity will be very low. Any debts written off during the liquidation process would be recorded as other changes in volume. For equity, only transactions and/or other price changes can be recorded during the liquidation process. Other changes in volume may be recorded at the final liquidation of shares with a near-zero value.

350. Mineral exploration activities present a special case of equity write-offs. The purchase of a mineral exploration licence is a sufficient criterion to recognise a notional unit within the economy where the mineral exploration is to take place. As activity takes place and equipment is purchased or provided to the exploration operations, a branch is considered to be established. The provision of equipment is recorded as a transaction reflecting the injection of equity in the branch. Valuation changes may also occur depending on the expectations of a find. If the exploration fails to identify a viable resource discovery and the operator ‘walks away’ from the activities, the investment in the branch is extinguished through a volume change. This is a borderline case – where there are assets that are sold, the appropriate treatment is to revalue the investment to the value received for the assets and then extinguish the investment through a transaction reflecting the sale of the assets and withdrawal of equity.

Uncompensated seizure

351. DIEs may also be subject to seizure by national governments on occasion (for example where a government decides to nationalise certain industries within its jurisdiction without compensation). This extinguishes the equity that the direct investor has in the enterprise in the economy, with the equity position being reduced to zero through a volume change. When entities are only indirectly impacted by uncompensated asset seizures through their ownership of entities that had their assets seized, then the impact should be recorded as other price changes rather than other changes in volume (see Section 5.4).

Catastrophic losses

352. Catastrophic losses are the result of large scale, discrete, and recognisable events that may destroy a significantly large number of assets within any of the asset categories. Such events will generally be easy to identify. They include major earthquakes, volcanic eruptions, tidal waves, drought, exceptionally severe hurricanes, and other natural disasters; acts of war, riots, and other political events; and industrial accidents, such as major toxic spills or release of radioactive particles into the air. Catastrophic losses mostly occur for non-financial assets, but they may also arise for financial assets and are recorded as other changes in volume. Major losses, such as deterioration in the quality of land caused by abnormal flooding or destruction of buildings in earthquakes, are relevant to direct investment because branches or notional units are identified when non-residents own real estate and other natural resources. If the property’s value is completely wiped out, the loss should be recorded under direct investment as other changes in volume on the asset side for the economy of the direct investor and on the liability side for the economy of the direct investment enterprise as the notional unit effectively ceases to exist. However, if some value remains, the loss should be recorded under direct investment as an ‘other’ price change on the asset side for the economy of the direct investor and on the liability side for the economy of the direct investment enterprise (see also BPM7, Chapter 9, Section B.2a, paragraph 9.31a). This is because the direct investor technically owns equity in the notional unit and not the real estate itself. In addition, where evidence of ownership of financial assets depends on written records and these records are destroyed, it may not be possible to re-establish ownership, and other changes in volume should therefore be recorded.

Treatment of assets declared under tax amnesty

353. A case of the economic appearance of an asset that is relevant to FDI is that of tax amnesty. A tax amnesty is a limited-time opportunity for a specified group of taxpayers to report undeclared income and assets relating to an earlier tax period and pay an amount in exchange for forgiveness of the tax liability, without fear of criminal prosecution. If the declared income and assets were not estimated and considered significant for the economy, or significantly differ from the current estimates, adjustments should be undertaken to record data on the corresponding instruments. Such adjustments should ideally be implemented as transactions in the relevant periods, ensuring that adjustments for both income and assets are consistent. However, if it is not possible to adjust historical series on assets declared under tax amnesties, as a second best these assets can be recorded in the IIP in the current period through other changes in volume.

Reclassifications

354. A reclassification entry is necessary when a financial instrument changes its characteristics without there having been a cross-border transaction. Two types of reclassifications particularly relevant to direct investment are a change in functional category and a change of residence.

Change in functional category

355. For direct investment, a common issue is how to treat an existing equity position when a further purchase is made to take the total position to one that represents at least 10% of the voting power in an organisation. The original equity position is reclassified to direct investment through a volume change to include it in the direct investment equity position. Similarly, any pre-existing debt positions are reclassified to direct investment debt positions through a volume change. When voting power is reduced, equity and debt positions are removed from direct investment through volume changes. It should be recognised that there does not need to be any transactions for voting power to cross the 10% threshold – for example, a position can increase in proportion due to share buybacks; while positions can decrease due to the issuance of additional shares.

Change in residence

356. When persons and other entities change their economy of residence, their existing assets and liabilities are added or removed from the IIP through reclassifications rather than by imputing transactions. The change in the residence does not involve a transaction between two entities, but a change in the status of a single entity. When a person changes residence, this is considered to be a reclassification of their residence – any direct investment assets held in the economy to which the person has moved are reclassified out of the direct investment position as a volume change (as the position has become one between two residents of the same economy). Direct investment assets held by the person in their former place of residence are reclassified into the direct investment position as a volume change.

357. Corporations sometimes change residence (i.e., corporate re-domiciliation). Most cases labelled as corporate migration involve transactions between entities. However, in the case when a corporate change of residence occurs, the change in the residence of the owner of financial assets and liabilities is treated as a reclassification, in the same way as a change of residence of individuals. Corporations with a European legal form (SE, Societas Europaea) can change residence from one economy to another within the European Union (EU) without the need to change financial contracts with debtors and creditors when they migrate. As a result, the incidence of corporate re-domiciliation may be particularly relevant for EU member states. When corporate re-domiciliations are observed, the exchange of information between compilers, to the extent allowed under confidentiality rules, can help ensure consistent recording of the move.

358. On occasion, land can change from being part of one economy to being considered part of another economy, whether through mutual agreement or annexation, or be considered to be a new economy. This may create or extinguish direct investment positions that residents of either economy had with residents of the area of land that changed jurisdiction. The creation and extinction of the direct investment positions are treated as volume changes.

359. A similar situation arises with the change of membership in country groups. For example, the EU has changed its membership on a number of occasions. This can result in the positions between the country group and the new member being extinguished (in statistics for the country group as a whole), and positions between the country group and other countries being created. These should be treated as volume changes.

5.4. Implications of ownership chains and retained earnings for other flows

360. Other changes in financial assets and liabilities will sometimes impact the value of an entity. For example, the value of a DIE may change due to exchange rate movements if it holds external assets and liabilities denominated in foreign currencies. These changes should be recorded as exchange rate changes by the economy of the DIE. The value of a DIE is also likely to change if its financial assets in a specific economy are seized with no compensation. These changes should be recorded as other changes in volume by the economy of the DIE. Conversely, the economy of the direct investor should record such changes in the value of (directly or indirectly owned) DIEs as other price changes. The economy of an investor should only record exchange rate changes if there is a change in the equity value resulting directly from the currency denomination of the DIE’s equity. Similarly, it should only record other volume changes when there is change in the value of its equity holdings that is neither due to transactions nor due to revaluations, e.g., if the shares it holds in the DIE have been seized.

361. Reinvested earnings are imputed for direct investor’s equity in their DIEs. However, reinvested earnings are not recorded for equity investment between fellow enterprises or for reverse equity investment (see Section 3.3.2). When reinvested earnings are recorded, they contribute to the change in the value of the position through transactions. In cases where reinvested earnings are not recorded, these earnings contribute to revaluations. A similar treatment should be followed for the distribution of the proceeds from the sales of assets. These will be treated as negative equity transactions for the direct investor’s investment in its DIEs but as negative price changes for investment between fellow enterprises and reverse investment.

Box 5.1. Calculating other price changes when market prices are used to value equity

The calculation of other price changes when reinvested earnings are not recorded (i.e., equity investment between fellow enterprises and reverse equity investment as well as other functional categories, such as portfolio investment) is:

$Price change=Position \left(t-1\right)*\left(\frac{MP\left(t\right)}{MP\left(t-1\right)}\right)-Position (t-1)$

where MP is market price.

In this case, the impact of reinvested earnings and the distributions of proceeds from the sales of assets on the market price of equity are treated as revaluations.

In the case of the direct investor’s equity in its direct investment enterprise, the calculation of other price changes is:

$Price change=Position \left(t-1\right)*\left(\frac{MP\left(t\right)}{MP\left(t-1\right)}\right)-Position \left(t-1\right)-Transactions \left(t\right)$

where

$Transactions \left(t\right)=reinvestment of earnings \left(t\right)+distribution of proceeds from sales of assets \left(t\right)$

This isolates the impact of these transactions from the rest of the change in the market price. It is consistent with the recommendation that other price changes reflect all changes to the market value of an instrument as expressed in the compilation currency that are not exchange rate changes or attributable to transactions.

362. When market prices are used to value listed equity or the market capitalisation method is used to value unlisted equity, the value of reinvested earnings and the distribution of the proceeds from the sales of assets will impact the market prices and the market price indices used in these methods. Therefore, the value of reinvested earnings and the distributed proceeds from the sales of assets should be removed from the calculation of other price changes. Box 5.1 explains how to do this.

363. Table 5.2 summarises the recording of the different cases above. Because the recording depends on the specific relationship, it distinguishes between the recording in the economy of the direct investor in the DIE, in the economy of the DIE, and between fellow enterprises and reverse investment.

Table 5.2. Summary of recording

	Economy of direct investor in directly held DIE	Economy of DIE	Between fellow enterprises and reverse investment
Impact of movements in exchange rates on financial instruments denominated in a currency other than the currency of compilation	ERC*	ERC	ERC
Change in market price of listed equity (or unlisted equity valued using the market capitalisation method)	OPC	OPC	OPC**
Direct investor sells a DIE for more or less than the value recorded in the position	OPC***	OPC***	OPC**,***
Debt securities held between related parties impacted by changes in interest rates or credit ratings	OPC	OPC	OPC
Complete debt cancellation or debt write-off	OCV	OCV	OCV
Partial debt cancellation or debt write-off	OPC	OPC	OPC
Debt forgiveness or debt assumption	T	T	T
Liquidation of a DIE with no return to the investor	OPC and OCV	OPC and OCV	OPC and OCV
Liquidation of a DIE with partial return to the investor	OPC and T	OPC and T	OPC and T
Investor walks away from a failed mineral exploration	OPC and OCV	OPC and OCV	OPC and OCV
Failed mineral exploration with partial return	OPC and T	OPC and T	OPC and T
Uncompensated seizure (total)	OPC****	OCV	OPC**
Catastrophic loss (e.g., buildings destroyed in an earthquake)	OPC and OCV	OPC and OCV	OPC and OCV**
Assets declared under a tax amnesty	T and OCV*****	T and OCV*****	T and OCV*****
Change in functional category	OCV	OCV	OCV
Change in residence	OCV	OCV	OCV
Reinvested earnings	T	T	OPC**
Distribution of proceeds from sales of assets	T	T	OPC**

Notes: T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume

* The economy of a direct investor should only record ERC if there is a change in the equity value of the DIE resulting directly from the currency denomination of the DIE’s equity. Changes in the equity value of indirectly held enterprises resulting from ERC would be recorded as OPC by an indirect investor.

**Applies to equity investment between fellow enterprises and reverse equity investment.

***However, if the difference is significant, compilers are encouraged to revise the positions backward to better reflect its market value.

****Recorded as OPC unless the shares that the direct investor holds in the DIE have been seized; then it should be recorded as OCV.

*****Compilers are encouraged to revise transactions backward to reflect the acquisition of the assets, but, if this is not possible, they can be recorded as OCV instead.

References

[1] IMF (Forthcoming), Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7), International Monetary Fund, Washington D.C.

Annex 5.A. Numerical examples of reconciliation of positions and flows

364. This annex presents several numerical examples of the recording of transactions, revaluations, and other changes in volume as part of the reconciliation of the opening and closing foreign direct investment (FDI) positions. The examples and recording shown in the tables are considered from the point of view of the direct investment enterprise (DIE). The economy of the direct investor will usually record the cases in the same way although there are exceptions; however, the increase or decrease in value of the DIE will generate the same change in value of the direct investor’s assets.

Construction company selling real estate

365. A DIE in the construction industry has an opening position of USD 100. In period 1, the DIE generates earnings (USD 300) coming from construction services provided on various projects; these earnings are measured according to the current operating performance concepts (COPC). The direct investor chose to reinvest all of these earnings in the DIE; as a result, the economy of the DIE will record reinvestment of earnings of USD 300.

366. In period 2, the DIE sells a piece of real estate that it had held for several years without improving it, realising a holding gain of USD 200. Before considering the impact of this sale, the COPC earnings of this DIE were USD 400 (operational earnings coming from construction services provided during the period). The direct investor chooses to reinvest all of the COPC earnings and the proceeds from the sale of the real estate in the DIE. As a result, the economy of the DIE will record reinvestment of earnings of USD 400 and a revaluation (other price changes) on the sales of the asset because the holding gain is excluded from the COPC earnings of the DIE. Annex Table 5.A.1 shows the reconciliation of the opening and closing positions of the DIE.

Annex Table 5.A.1. Example of a DIE in the construction industry selling real state

Period	Beginning of period: FDI liabilities	Accumulation Accounts							End of Period: FDI liabilities
		Financial account T	Revaluations	Due to:		OCV	Of which:
				ERC	OPC		Cancellation and write-offs	Reclassifications
1	100	300	0	0	0	0	0	0	400
2	400	400	200	0	200	0	0	0	1 000

Note: All values are in USD. T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume.

367. The economy of the direct investor would record the same entries as the DIE for its FDI assets (i.e., reinvestment of earnings and other price changes). The recording would be the same for holding gains and losses on any asset sold by the DIE—the holding gain or loss would be excluded from COPC earnings and recorded as a revaluation (other price changes); the treatment also applies to the holding gains or losses from the sale of an asset by a DIE in any industry. If the direct investor had chosen to distribute some or all of the proceeds from the sale of the asset, it would be recorded as an equity capital withdrawal because the proceeds are not part of the DIE’s COPC earnings.

Tax credit

368. In period 1, a DIE has an opening position of USD 100 and has recorded negative COPC earnings of USD -10. As a result of this loss, the DIE can carry forward a tax credit to the next period. During period 1, USD -10 of reinvestment of earnings is recorded, and there are no other transactions. Thus, the closing position of period 1 is USD 90.

369. In period 2, the tax is determined by the current income of the DIE in that period and also by the tax credit earned in the previous period. The tax credit is included in the COPC earnings. Assume the DIE generates COPC earnings equal to USD 8, including the tax credit of USD 1. The direct investor chooses to reinvest all of these earnings in the DIE, and thus reinvestment of earnings equal to USD 8 are recorded. Annex Table 5.A.2 shows the reconciliation of the opening and closing FDI positions of this DIE. The economy of the direct investor would record the same entries for FDI assets.

Annex Table 5.A.2. Examples of tax credits due to carrying forward losses

Period	Beginning of period: FDI liabilities	Accumulation Accounts							End of Period: FDI liabilities
		Financial account T	Revaluations	Due to:		OCV	Of which:
				ERC	OPC		Cancellation and write-offs	Reclassifications
1	100	-10	0	0	0	0	0	0	90
2	90	8	0	0	0	0	0	0	98

Note: All values are in USD. T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume.

Partial impairment of an asset

370. Assume a DIE has an opening position of USD 100. The DIE is facing difficulties operating amid deteriorating conditions in the host country. Therefore, the projected future cash flows from the asset are less than its current carrying value. As a result, the DIE records an impairment of its assets of USD 20 in its financial statements. The impact of this impairment on the DIE’s earnings are excluded from the COPC earnings; in this case, assume the earnings of the DIE after the exclusion are zero. The recording of the impairment will lead to a decrease of USD 20 in the equity value of the DIE to USD 80 in the DIE’s books. This decrease will be recorded as a revaluation (other price changes). Annex Table 5.A.3 shows the reconciliation of the opening and closing position of the DIE. The economy of the direct investor would make the same entries for FDI assets.

Annex Table 5.A.3. DIE recording of impairment of assets

Period	Beginning of period: FDI liabilities	Accumulation Accounts							End of Period: FDI liabilities
		Financial account T	Revaluations	Due to:		OCV	Of which:
				ERC	OPC		Cancellation and write-offs	Reclassifications
1	100	0	-20	0	-20	0	0	0	80

Note: All values are in USD. T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume.

Group restructuring

371. Multinational enterprises can restructure their operations. Even though these restructurings are internal to the enterprise group, they often need the agreement of the parties involved, and, thus, qualify as transactions. They will also sometimes result in the issuing of new financial instruments. This section will illustrate the recording for several examples of enterprise group restructuring.

Revaluation prior to a group restructuring

372. At the beginning of the period, a DIE has a value of USD 100. During the current period, some assets of this DIE (for example, a revaluation of intellectual property) increase their value, and a revaluation of USD 500 is recorded. There is no impact on COPC earnings because there is no registration in the profit and loss account. This revaluation occurs prior to a group restructuring that will lead this DIE to be relocated to a different country. Annex Table 5.A.4 shows the reconciliation of the opening and closing FDI position for the DIE. The economy of the direct investor would record the same entries for its FDI assets.

Annex Table 5.A.4. Example of revaluation of intellectual property rights before group restructuring

Period	Beginning of period: FDI liabilities	Accumulation Accounts							End of Period: FDI liabilities
		Financial account T	Revaluations	Due to:		OCV	Of which:
				ERC	OPC		Cancellation and write-offs	Reclassifications
1	100	0	500	0	500	0	0	0	600

Note: All values are in USD. T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume.

Shutting down a DIE and moving some of its business to a DIE in another economy

373. The head of a banking group, A, in economy A decides to reorganise its structure by closing DIE B in economy B and to move its foreign repurchase agreement (i.e., repo) business to a newly created DIE C in economy C. Enterprises A and B sign the agreement to close B, and, therefore, all the operations in equities based on that agreement should be treated as transactions. In period 1, direct investor A has an equity position in DIE B of USD 100, and DIE C does not yet exist. DIE B holds deposit liabilities of USD 50 with unaffiliated non-residents that will be repaid when DIE B is shut down. It also has loans of USD 150 it made to unaffiliated non-residents as part of the foreign repo business. The clients of DIE B must be informed of the change from DIE B to DIE C as the creditor for solvency reasons and can cancel the instruments before they reach maturity.

374. In period 2, direct investor A signs an agreement to establish DIE C, and the acquisition of equities is recorded as a transaction. DIE B has disappeared, and the balance sheet is 0. DIE C is performing the repo business, and it takes over some of the repo business from DIE B (i.e., for those who decided not to cancel the instrument) and has also gained new clients.

375. Annex Table 5.A.5 shows the reconciliation of the opening and closing external positions for economies A, B, and C. For economy A, there is no change in total FDI assets, but these positions have moved from economy B to economy C. This move was achieved through a negative transaction of USD 100 with economy B that is completely offset by a positive USD 100 transaction with economy C in period 2. These transactions are shown in the panels for economies B and C. The deposits (USD 50) are repaid and are not moved to DIE C; this is recorded as a transaction under other investment. The foreign repo business is recorded under other investment; the movement of USD 70 of the foreign repo business corresponding to the business transferred to DIE C out of the original asset of USD 150, the loss of USD 80 in clients, and the acquisition of USD 40 of new clients would be shown as transactions because the customers had to agree to the change from DIE B to DIE C under other investment in Annex Table 5.A.5; these transactions would represent the net acquisition of financial assets of USD -150 in economy B (USD -70 + USD -80) and the net acquisitions of financial assets of USD 110 in economy C (USD 70 + USD 40).

Annex Table 5.A.5. Example of shutting down a DIE and moving a business line to another DIE

Period	Account	Beginning of period:	Accumulation Accounts							End of Period:
			Financial account T	Revaluations	Due to:		OCV	Of which:
					ERC	OPC		CWO	R
Economy A records:
1	FDI assets	100	0	0	0	0	0	0	0	100 (B)
2	FDI assets	100	0	0	0	0	0	0	0	100 (C)
Economy B records:
1	FDI liabilities	100	0	0	0	0	0	0	0	100
1	OI liabilities	50	0	0	0	0	0	0	0	50
1	OI assets	150	0	0	0	0	0	0	0	150
2	FDI liabilities	100	-100	0	0	0	0	0	0	0
2	OI liabilities	50	-50	0	0	0	0	0	0	0
2	OI assets	150	-150	0	0	0	0	0	0	0
Economy C records:
1	FDI liabilities	0	0	0	0	0	0	0	0	0
1	OI assets	0	0	0	0	0	0	0	0	0
2	FDI liabilities	0	100	0	0	0	0	0	0	100
2	OI assets	0	110	0	0	0	0	0	0	110

Note: All values are in USD. T = transactions; OI=Other Investment; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume; CWO=Cancellations and write-offs; R=Reclassifications.

Shifting a line of business from one DIE to another but the first DIE continues to exist

376. This case is much like above, but instead of shutting down DIE B in economy B, direct investor A decides to keep its DIE B in business after transferring some of the foreign repo business to DIE C. In period 1, direct investor A has an equity position in DIE B of USD 100, and DIE C does not yet exist. DIE B holds deposit liabilities of USD 50 and loans of USD 120 with unaffiliated non-residents. The clients of DIE B must be informed of the change from DIE B to DIE C as the creditor for solvency reasons and can cancel the instruments before they reach maturity.

377.  In period 2, direct investor A signs an agreement to establish DIE C and another one to reduce the capital of DIE B, and, so, the transfer of equities is recorded as a transaction. Direct investor A moves half of the equity in DIE B (USD 50) to DIE C, and both DIEs B and C are performing the repo business. DIE C has taken over some of the financial assets of DIE B (repo business from DIE B) for a value of USD 50 that is also recorded as a transaction.

378. Annex Table 5.A.6 shows the reconciliation of the opening and closing external positions for economies A, B, and C. For economy A, there is no change in total FDI assets, but half of the initial position of USD 100 in economy B has moved to economy C. This move was achieved through a negative transaction of USD 50 with economy B that is completely offset by a USD 50 transaction with economy C in period 2. These transactions are shown in the panels for economies B and C.

379. The movement of part of the foreign repo business would be shown as transactions under other investment in Annex Table 5.A.6. For economy B, there is no change in its deposits during the two periods, but USD 50 of the loans are moved to economy C, which is recorded as a transaction.

Annex Table 5.A.6. Example of splitting a line of business between an existing DIE and a new DIE

Period	Account	Beginning of period:	Accumulation Accounts							End of Period:
			Financial account T	Revaluations	Due to:		OCV	Of which:
					ERC	OPC		CWO	R
Economy A records:
1	FDI assets	100	0	0	0	0	0	0	0	100 (B)
2	FDI assets	100	0	0	0	0	0	0	0	100 (50 with B and 50 with C)
Economy B records:
1	FDI liabilities	100	0	0	0	0	0	0	0	100
1	OI liabilities	50	0	0	0	0	0	0	0	50
1	OI assets	120	0	0	0	0	0	0	0	120
2	FDI liabilities	100	-50	0	0	0	0	0	0	50
2	OI liabilities	50	0	0	0	0	0	0	0	50
2	OI assets	120	-50	0	0	0	0	0	0	70
Economy C records:
1	FDI liabilities	0	0	0	0	0	0	0	0	0
1	OI assets	0	0	0	0	0	0	0	0	0
2	FDI liabilities	0	50	0	0	0	0	0	0	50
2	OI assets	0	50	0	0	0	0	0	0	50

Note: All values are in USD. T = transactions; OI=Other Investment; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume; CWO=Cancellations and write-offs; R=Reclassifications.

DIE suffers a large loss in value of its assets and then is liquidated

380. At the start of period 1, direct investor A in economy A has a position in its DIE B in economy B of USD 100. During period 1, the value of the equities held by DIE B in its portfolio is reduced by USD 30. DIE B holds in its portfolio only foreign securities that were valued as USD 50, and the change is recorded as a revaluation (other price change) by economy B in portfolio investment during period 1, reducing the value to USD 20. In addition, DIE B recognises that a financial claim of USD 40 on unaffiliated non-residents can no longer be collected. This change is recorded as other change in volume in other investment. As a consequence of the reduction in value of these assets, the value of the equity liabilities of DIE B calculated at own funds at book values (OFBV) is reduced to USD 30. This reduction of 70 will be recorded as revaluations (other price changes) by both economies A and B when reconciling the FDI positions.

381. During period 2, DIE B is liquidated. The assets (including the remaining foreign securities of USD 20) are sold for a total of USD 80; of this, USD 50 is used to pay unaffiliated resident creditors, leaving a residual value of USD 30. To liquidate the company, a transaction in equity between A and B is recorded equal to the residual funds (USD 30). Annex Table 5.A.7 shows the recording of economies A and B to reconcile the opening and closing FDI positions as well as of the other functional categories relevant to the case.

Annex Table 5.A.7. Example of loss in value of assets of a DIE that is then liquidated

Period	Account	Beginning of period:	Accumulation Accounts							End of Period:
			Financial account T	Revaluations	Due to:		OCV	Of which:
					ERC	OPC		CWO	R
Economy A records:
1	FDI assets	100	0	-70	0	-70	0	0	0	30
2	FDI assets	30	-30	0	0	0	0	0	0	0
Economy B records:
1	FDI liabilities	100	0	-70	0	-70	0	0	0	30
1	Portfolio investment assets	50		-30		-30				20
1	Other investment assets	40	0		0		-40	-40	0	0
2	FDI liabilities	30	-30	0	0	0	0	0	0	0
2	Portfolio investment assets	20	-20	0	0	0	0	0	0	0
2	Other investment assets	0	0	0	0	0	0	0	0	0

Note: All values are in USD. T = transactions; ERC = exchange rate changes; OPC = other price changes; and OCV = other changes in volume; CWO=Cancellations and write-offs; R=Reclassifications.

Note

← 1.  BPM7 discusses two types of appearance and disappearance of financial assets and liabilities (BPM7, Chapter 9, Section C.2). The first of these is the monetisation and demonitisation of gold bullion, which is not relevant to FDI. The second is the treatment of assets declared under a tax amnesty, which may be relevant to FDI (see BPM7, Chapter 9, paragraph 9.12b).