Direct InvestmentHow to compile Flows and Positions

Course on Balance of Payments and International Investment Position Manual

(BPM6)

IMF-PFTACNadi

November 22-December 1, 2010

BP10

Introduction

Identifying DIEs and DIs Information kept by DIEs and DIs Measuring equity & debt, positions & flows Treatment of SPEs, land and resources and

direct investment abroad Data availability Compiling a worksheet

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Identifying DIEs and DIs

Banks & insurances enterprises Oil distribution branches Foreign owned businesses Public enterprises with direct investors Real estate Special purpose entities (SPEs) Direct investment abroad

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Information kept by DIEs and DIs

Annual balance sheet and profit and loss reports

Quarterly operating data

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Annual balance sheet

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Balance sheet for ABC Company $'000 2009 2010 2009 2010Liabilities AssetsLoans payable 24 22 Bank deposits and cash 10 13Accounts payable 5 4 Accounts receivable 5 7Provisions 12 13 Inventories 66 63Total liabilities 41 39 Building & equipment

Purchase priceShareholders' funds Less depreciation 105 107Common stock/issued capital 20 20Surplus (reinvested earnings) 125 131

Net equity 145 151 Total assets 186 190

Annual balance sheet

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Balance sheet for ABC Company $'000 2009 2010 2009 2010Liabilities AssetsLoans payable 24 22 Bank deposits and cash 10 13Accounts payable 5 4 Accounts receivable 5 7Provisions 12 13 Inventories 66 63Total liabilities 41 39 Building & equipment

Purchase priceShareholders' funds Less depreciation 105 107Common stock/issued capital 20 20Surplus (reinvested earnings) 125 131

Net equity 145 151 Total assets 186 190

NOTE: Change in surplus = 6

Annual profit and loss statement

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Income & expenditure (profit & loss) statement $000

2010

Sales (revenue) 83

Cost of goods sold 45

Administrative costs 10

Operating profit 28

Other income payable and receivable 10

Profit before tax 18

Tax 8

Net profit after tax 10

Dividends paid 4

Retained earnings 6

How to measure equity

Level of DI Net equity of shareholders x DI’s share

Equity Flow New investment (less withdrawal of investment)

(Change in paid up capital) x DI’s share

+ Reinvestment of earnings (Income statement = Change

in Balance Sheet) x DI’s share Other changes (Change in level minus flow)

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How to measure equity Cont.

Investment income Dividends x DI’s share Reinvested earnings x DI’s share

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Net equity in branch (quasi corporations)

Branches are unincorporated enterprises (quasi corporations) wholly owned by the DI Branches may operate like subsidiaries

In which case their accounts will look a lot like those of incorporated companies Net equity in quasi corporation (replaces net equity of

shareholders) Reinvestment of earnings (finance) and reinvested earnings

(investment income) ‘Withdrawals of income from quasi corporations’ replaces

‘dividends’04/21/23 10

Net equity in branch (quasi corporation) Cont.

Branches may be operational only Accounting detail less & usually no retained earnings

Net equity in quasi corporation (replaces net equity of shareholders)

Reinvestment of earnings (finance) and reinvested earnings (investment income) - likely to be nil

‘Withdrawals of income from quasi corporations’ replaces ‘dividends’

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How to measure debt

Banks Deposits and loans with and from nonresidents

are not treated as direct investment Possibly accounts receivable an payable to

parent/head office for services - DI Insurance enterprises

Claims on and liabilities to DI are treated as DI

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How to measure debt Cont.

Oil distribution branches, Foreign owned businesses, Public enterprises with direct investors Claims on and liabilities with nonresident DI is

treated as DI. Real estate and other resources

Value of land (Net equity in quasi corporation)

Income earned less expenses (withdrawals of income from quasi corporate enterprises)

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Special purpose entities (SPEs)

Are flexible corporate structures with little or no physical presence Described as shell companies, shelf companies,

and brass plate companies Often offered various benefits - low or

concessional tax rates, speedy and low-cost incorporation, limited regulatory burdens and confidentiality.

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Special purpose entities (SPEs) Cont.

No internationally standard definition but typically their owners are not residents of the territory of

incorporation their balance sheets are largely claims/liabilities vis-à-

vis non-residents few or no employees have little or no physical presence

Treated as resident of country of incorporation04/21/23 15

Direct investment abroad

While no so obvious, it is rather common Businesses owned by individuals abroad Land owned by residents abroad Enterprises owned by public enterprises abroad SPEs owned abroad

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Data availability

Some entities have good data, e.g. banks and foreign owned organisations

Accounts may be out-of-date Accounts may be held abroad Little data on SPEs Concerns over collection authority and

confidentiality

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Compiling a worksheet

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Opening position

Financial flow

Volume change

Valuation change

Closing position

Investment income

Issued capital

Reinvestment of earnings

Assets - Debt

Liabilities - Debt