1. Direct Investment How to compile Flows and Positions Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP10

2. 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 10/8/20152

3. 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 10/8/20153

4. Information kept by DIEs and DIs  Annual balance sheet and profit and loss reports  Quarterly operating data 10/8/20154

5. Annual balance sheet 10/8/20155 Balance sheet for ABC Company $'000 20092010 20092010 LiabilitiesAssets Loans payable2422Bank deposits and cash1013 Accounts payable54Accounts receivable57 Provisions1213Inventories6663 Total liabilities4139Building & equipment Purchase price Shareholders' funds Less depreciation105107 Common stock/issued capital20 Surplus (reinvested earnings)125131 Net equity145151Total assets186190

6. Annual balance sheet 10/8/20156 Balance sheet for ABC Company $'000 20092010 20092010 LiabilitiesAssets Loans payable2422Bank deposits and cash1013 Accounts payable54Accounts receivable57 Provisions1213Inventories6663 Total liabilities4139Building & equipment Purchase price Shareholders' funds Less depreciation105107 Common stock/issued capital20 Surplus (reinvested earnings)125131 Net equity145151Total assets186190 NOTE: Change in surplus = 6

7. Annual profit and loss statement 10/8/20157 Income & expenditure (profit & loss) statement $000 2010 Sales (revenue)83 Cost of goods sold45 Administrative costs10 Operating profit28 Other income payable and receivable10 Profit before tax18 Tax8 Net profit after tax10 Dividends paid4 Retained earnings6

8. 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) 10/8/20158

9. How to measure equity Cont.  Investment income Dividends x DI’s share Reinvested earnings x DI’s share 10/8/20159

10. 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’ 10/8/201510

11. 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’ 10/8/201511

12. 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 10/8/201512

13. 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) 10/8/201513

14. 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. 10/8/201514

15. 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 incorporation 10/8/201515

16. 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 10/8/201516

17. 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 10/8/201517

18. Compiling a worksheet 10/8/201518 Opening position Financial flow Volume change Valuation change Closing position Investment income Issued capital Reinvestment of earnings Assets - Debt Liabilities - Debt