Download What Are Services?

Balance of Payments Division
IMF Statistics Department
Implementation of BPM6 Recommendations on
International Transactions in Services and Foreign
Direct Investment
Seminar on the Implementation of the International Statistical
Standards in the Financial Statistics of Eurasian Economic Union
(EAEU)
Dilijan, Armenia
May 31－June 3, 2016
Reproductions of this material, or any parts of it, should refer to the IMF Statistics Department as the source.
Balance of Payments Division
IMF Statistics Department
Outline
 What are services?
 Classification of services and data sources
• Manufacturing services on physical inputs owned by others
• Maintenance and repair
• Transport
• Travel
• Construction
• Insurance
• Charge for use of intellectual property
• Financial services
• Telecommunication, computer, and information services
• Other business services
• Government goods and services n.i.e.
2
Balance of Payments Division
IMF Statistics Department
What Are Services?
 Results of the production process that:
• change the condition of the consuming units



•
•
•
Changes in the condition of the consumer’s goods: the producer works
directly on goods owned by the consumer by transporting, cleaning,
repairing or otherwise transforming them
Changes in the physical condition of persons: the producer transports the
persons, provides them with accommodation, provides them with medical
or surgical treatments, improves their appearance, etc.
Changes in the mental condition of persons: the producer provides education,
information, advice, entertainment or similar services in a face to face
manner.
facilitate the exchange of products or financial assets
not generally separate items over which ownership rights can be
established
Cannot generally be separated from their production
3
Balance of Payments Division
IMF Statistics Department
Services Classification
Type of Service
Manufacturing services on physical inputs owned by others
Product-based
Maintenance and repair services, n.i.e.
Product-based
Travel
Transactor-based
Transport
Product-based
Construction
Transactor-based
Insurance and pension services
Product-based
Financial services
Product-based
Charges for the use of intellectual property, n.i.e.
Product-based
Telecommunications, computer, and information services
Product-based
Other business services
Product-based
Personal, cultural and educational services
Product-based
Government goods and services, n.i.e.
Transactor-based
4
Balance of Payments Division
IMF Statistics Department
Manufacturing Services on
Physical Inputs Owned by Others
 In BPM6, Manufacturing services on physical inputs
owned by others are recorded in services if the goods
do not change ownership (change from BPM5)
 Significant impact for some countries with specialized manufacturing activities:

the value of flows of goods are likely to be significantly reduced, while the flows in services will
increase with BPM6
 Covers processing, assembly, labeling, packing, etc. undertaken by enterprises that
do not own the goods concerned
 Covers the transaction between the owner and the processor—only the fees for the
service are included in this item
•
Examples: oil refining, clothing and electronic assembly, other assembly,
labeling, packing
 Excludes: assembly of prefabricated construction and packing activities incidental
to transportation
5
Balance of Payments Division
IMF Statistics Department
Manufacturing Services on Physical Inputs Owned
by Others – Recording of Related Transactions
Export of processing services (inward processing), Resident = processor (contractor)
Inward processing
(Export of processing services)
1
2
3
4
IMTS Recording
(processor’s territory)
BOP/NA Recording (processor’s
economy
Import
Export
Debit
Credit
Goods received by resident processor for Import of Export of
Service: Processing
processing. Transformed goods leave goods for processe
fee
processor’s economy once processed
processing d goods
Goods received by resident processor.
Goods:
Import of
Transformed goods are purchased by
Purchase of Service: Processing
goods for
residents of processor’s economy once
processed
fee
processing
processed
goods
Goods purchased by non-resident principal
Service: Processing
Goods:
in the resident processor’s economy
fee
Purchase of
Transformed goods are purchased by
Goods: Sales of
processed
residents of processor’s economy once
goods (input) to nongoods
processed
resident principal
Service: Processing
Goods purchased by non-resident principal
Export of
fee
in the resident processor’s economy
processe
Goods: Sales of
Transformed goods leave processor’s
d goods
goods (input) to noneconomy once processed
resident principal
6
Balance of Payments Division
IMF Statistics Department
Example 1: Manufacturing Services on
Physical Inputs Owned by Others
Merchandise with manufacturing services that change the condition of
the goods
A resident of A acquires oil from country B for 10. The oil is sent to
country C for refining for 15. The oil is sold then to country D for 30.
Goods and services entries for country A:
general merchandise (with country B):
10 (debit)
general merchandise (with country D):
30 (credit)
Manufacturing services on physical inputs
owned by others (with country C):
15 (debit)
Country C may wish to consider providing supplementary items on goods
received for processing and goods sent after processing
7
Balance of Payments Division
IMF Statistics Department
Maintenance and
Repair Services n.i.e.
 Now included under services rather than goods
 Covers maintenance and repair work undertaken by




residents on goods owned by nonresidents.
Includes value of repair work (including parts and materials
supplied by repairer)
Does not include the value of goods for repair
Data collection: enterprise survey or ITRS
Excludes:
• Construction repair and maintenance
• Maintenance and repair of computers
8
Balance of Payments Division
IMF Statistics Department
Transport Services:
Coverage
Transport services includes:
 services provided by all modes of transport



performed by residents of economy for those of another
carriage of passengers and the movement of goods (freight)
as well as rentals (charters) of carriers with crew
supporting and auxiliary services: cargo handling, navigation
fees and maintenance and cleaning of carriers
postal and courier services cover the pick-up, transport, and
delivery of letters, newspapers etc., including post office
counter and mailbox rental services
9
Balance of Payments Division
IMF Statistics Department
Transport Services: Classification
By what is carried
 Passenger
 Freight
 Other
By mode of transport
Sea Transport
Air Transport
Other Transport
Postal and Courier Services
 Other transport:
•
Additional modes such as





Space
Rail
Road
Inland waterway
Pipeline transport and electricity transmission
10
Balance of Payments Division
IMF Statistics Department
Passenger Services
 All services provided, between the compiling economy and
abroad or between two foreign economies, in the international
transport of:
•
•
Nonresidents by residents carriers (credit); and
Residents by nonresident carriers (debit)
 Fares and other expenditure related to the carriage of
passengers:
•
•
•
•
•
•
On-board food, gifts, souvenirs
Excess baggage charges
Accompanying personal effects, including autos
Any taxes levied on passenger services e.g., sales taxes or value added
taxes
For practical reasons fares that are part of package tours are included, but
exclude cruise fares which are included in travel
Covers rentals or operational leases of vessels, aircraft, freight cars, or
other commercial vehicles with crews for limited periods for the carriage
of passengers
11
Balance of Payments Division
IMF Statistics Department
Freight Services
 The treatment of freight services is a consequence of adopting
FOB as the uniform valuation principle for goods as discussed
in previous lecture on goods
 Since the FOB valuation is as at the customs frontier of the
exporting economy, so:
•
•
all freight costs up to the customs frontier are shown as incurred
by the exporter;
all freight costs beyond the customs frontier are shown as
incurred by the importer
 However, the arrangements for paying freight costs may differ
from the FOB terms of delivery -> rerouting is needed
 Rerouting of freight services may mean that a transaction that
is actually between two residents is treated as a transaction
between a resident and a nonresident and vice versa
12
Balance of Payments Division
IMF Statistics Department
Other Transport
“Other” subheading under sea and air includes:









Cargo handling charged billed separately from freight
Storage and warehousing
Packing and repackaging
Towing not included in freight services
Pilotage and other navigational aid for carriers
Air traffic control
Cleaning in ports and airports on transport equipment
Salvage operations
Agent fees associated with passenger and freight transport (freight
forwarding, handling and brokerage services)
13
Balance of Payments Division
IMF Statistics Department
Transport: Data Sources
 Data sources for transport services are presented in Table

12.1 of BPM6 CG
For exports
•
•
•
Enterprise surveys
ITRS
A data model could be developed base don available information (e.g.,
number of passengers transported, number of tickets sold, etc.)
 For imports
• ITRS if provides breakdown of import costs
• Survey of branches of nonresident transport operators
• A data model based on related information could be used
 Survey of companies that provide postal and courier services
14
Balance of Payments Division
IMF Statistics Department
Travel
 Travel credits cover goods and services for own



use or to give away, acquired from an economy by
nonresidents during visits to that economy
Travel debits cover goods and services for own use or to give
away acquired from other economies by residents during
visits to other economies
The standard component breakdown of travel is between
business and personal travel
Supplementary data for groups of special interest e.g. border,
seasonal, and other short-term workers within business
travel, health-related and education-related under personal
travel
15
Balance of Payments Division
IMF Statistics Department
Travel
 A demand oriented activity; travelers moves to the location of



the provider (residents of the economy visited) for the goods
and services desired
Travel covers an assortment of services, consumed by
travelers
It is a transactor-based classification
• Goods and services provided to visitors while on their trips
that would otherwise be classified under another item
(such as telecommunications or local transport) are
included under travel
Travel covers goods and services acquired in an economy by
travelers during visits of less than ONE year in the economy
16
Balance of Payments Division
IMF Statistics Department
Personal Travel
Business travel - travelers going abroad for business
 Carrier crews stopping over (but in-flight, or shipboard expenses
incurred by resident crew on resident carrier not included)
 Government employees on official travel
 Employees of international organizations on official business
 Employees travelling on behalf of their employer (except for
diplomatic staff, etc.)
 Self- employed nonresidents travelling for business purposes
 Seasonal, border, and other short term workers
Personal travel - travelers going abroad for purposes other than
business
17
Balance of Payments Division
IMF Statistics Department
Travel: Data Sources
 Data sources for travel services and estimations for travel
component are presented in Table 12.3 of BPM6 CG
Types of approaches for estimations
 Instruments used to measure expenditures by residents
traveling abroad
 Expenditures by type of goods and services acquired by residents
traveling abroad
 Partner economy data
 Data model
Data sources
 ITRS
 Surveys of travelers
 Surveys of tourism companies, hotels, domestic airlines, etc.
18
Balance of Payments Division
IMF Statistics Department
Construction
 Covers goods and services related to construction
• work done on buildings, land improvement, engineering,
as
as well as construction installation and assembly
 Work provided outside the country of residence of the enterprise performing
the work
•
However, if the operations are substantial, may constitute a resident branch in
country
 Comprises work performed on construction projects by an enterprise or site
office that is nonresident in the host country
 Generally the work is of a short-term nature (note the one year guideline for
residence)
 The value of the construction service should equal the full value of the
construction project (output)
 Gross value of output: value of all goods and services used as inputs to the
work, other costs of production, and the operating surplus that accrues to the
owners of the construction enterprise
19
Balance of Payments Division
IMF Statistics Department
Construction
•
Disaggregated and recorded on a gross basis

Allows for recording of both construction work in host and goods and
services acquired
 Construction abroad


Credit—construction work abroad by enterprises resident in
compiling economy
Debit—goods and services acquired from host economy by
resident construction enterprises
 Construction in compiling economy


Credit—goods and services acquired from compiling economy
by nonresident construction enterprises
Debit—construction work in compiling economy by nonresident
construction enterprises
20
Balance of Payments Division
IMF Statistics Department
Nonlife Insurance:
Measurement of Output /Insurance Services
 Insurance company sets level of actual premiums, so that
• Premiums earned + investment income earned on them – expected
•
claims
= margin that insurance company can retain
-> to cover costs and provide operating surplus
 In order to “mimic” the premium setting policy of insurance
companies we have to identify five separate items:
• premiums earned
• premium supplements
• expected claims
 claims payable
 (adjusted for claims volatility, if needed)
• insurance technical reserves
21
Balance of Payments Division
IMF Statistics Department
Nonlife Insurance:
Measurement of Output /Insurance Services
 Gross premiums earned:
• proportion of actual premiums, relating to the accounting period
• cover the risks incurred during the accounting period
• differ from premiums received, as they are usually paid in advance
• (credit extended by the policyholder to insurance company, i.e. unearned
premiums)
 Claims payable/incurred:
•
claims for events that occurred during the accounting period


•

claims that have not been reported
have been reported but not yet settled
have been reported and settled but not yet paid
… recognized as due on an accrual basis, whether or not paid, settled or
reported.
22
Balance of Payments Division
IMF Statistics Department
Nonlife Insurance:
Measurement of Output /Insurance Services
 Adjustments for claims volatility:
• In case of a significant unforeseeable event during the accounting period,
the derived insurance services rendered by the insurance company to the
policyholders should not turn into a negative figure

•
i.e., neither the volume nor the price of insurance services should be affected
by the volatility of claims
to reflect a longer term view of claims behavior
 The adjustment would be negative in periods when large values
of claims are incurred
•
thus increasing the value of the service by reducing the difference
between actual claims in a particular period and a normally expected
level of claims
23
Balance of Payments Division
IMF Statistics Department
Nonlife Insurance:
Measurement of Output /Insurance Services
 Reserves in insurance:
• Unearned premium reserves are that part of premiums written that apply
to the unexpired part of the policy period
plus
• Estimated loss reserves and reserves for claims incurred but not reported
are provisions set aside to meet the estimated costs of settling claims
 Premium supplements:
• as part of the business of insurance companies, these reserves are
•
•
managed on the financial markets
the income generated by these investments have a considerable
influence on the level of premiums that these companies have to charge
consequently, the income earned is treated as being receivable by the
policyholders who are then treated as paying it back to the insurance
companies as premium supplements (=imputation)
24
Balance of Payments Division
IMF Statistics Department
Example 2: Calculation of Nonlife
Insurance Services
Resident insurers:






Premiums earned from abroad
100 (premiums
received 105)
Claims payable abroad
140 (claims paid 130)
Net increase in technical reserves relating
to insurance with nonresidents due to
prepayment
5
Net increase in technical reserves relating
to insurance with nonresidents due to
claims incurred but not yet paid
10
Income attributable to policyholders
5 (premium
supplements)
Adjustment for volatility in claims payable:- 40
25
Balance of Payments Division
IMF Statistics Department
Example 2: Calculation of Nonlife
Insurance Services
Derived items for the BOP
 Goods and services account:
• insurance services= gross premiums earned + premium
supplements - expected claims (actual claims payable plus
adjustment for claim volatility)
• expected long-term claims: claims payable – adjustment:
140 – 40 = 100
• 100 + 5 – 100 = 5
 Primary income account:
•
•
investment income attributable to policyholder (premium
supplements)
=5
26
Balance of Payments Division
IMF Statistics Department
Insurance Services: Data Collection
 Data requests from resident insurers with separate data on
policyholders abroad:
•
•
•
•
•
premiums earned (pre-payments) and premiums received/written in a period
claims payable/due and claims paid in a period
level of technical reserves due to nonresident policyholders at the start of the
period
level of technical reserves due to nonresident policyholders at the end of the
period
income from technical reserves due to non-resident policyholders in the period
 If precise data on transactions and positions with nonresidents are

not available, to request the estimated ratio of nonresidents in total
transactions and positions
For import of insurance services (except reinsurance) data sources
could be:
•
•
ITRS
Enterprise surveys
 See BPM6 CG: Appendix 3 and Model form 11 in Appendix 8
27
Balance of Payments Division
IMF Statistics Department
Charges for the Use of
Intellectual Property n.i.e.
 Intellectual property products are largely the
results of research and development, computer
software and databases, and entertainment, literary or artistic
originals
 BPM5: transactions included under “royalties and license fees”
 BPM6 includes:
 Charges for the use of franchise and trademarks, like in BPM5
 Charges for the use of outcomes of R&D
 Licenses to reproduce, or distribute intellectual property embodied in




Produced originals and prototypes (copyrights on books, manuscripts)
Computer software
Audiovisual and related services (cinematographic works, and sound recordings)
Related rights (for live performances)
28
Balance of Payments Division
IMF Statistics Department
Charges for the Use of Intellectual
Property n.i.e.
 Data collection:
•
•
•
Business surveys (payments recorded as license fees, royalties,
other fees under license agreements, etc.)
Other surveys (special surveys, within globalization survey)
ITRS
 Recording should follow accrual principle and charges should
be spread over period of use
•
In practice: may only be able to record when payments are made
29
Balance of Payments Division
IMF Statistics Department
Financial Services
 Services provided by financial intermediaries and
auxiliaries (except those of insurance and pension funds).
Charged through:
i) Explicit charges
•
Charges associated with deposits and lending, commissions and brokerage
fees, fees related to letters of credit, financial leasing, money transfer,
foreign exchange transactions, etc.
• Early/late repayment fees
 But excludes increase in interest rates as a result of late payment
(considered with other interest – FISIM)
• Financial market regulatory services
• Service charges on purchases of IMF resources
Charges payable for arranging the provision of financial resources are to be
distinguished from amounts payable to the suppliers for the use of these financial
resources (=primary income)
30
Balance of Payments Division
IMF Statistics Department
Financial Services
ii) Margins on buying and selling transactions
•
•
•
Dealers in foreign exchange, bonds, notes, financial derivatives, etc.
(BPM5 only included dealers in foreign exchange)
Not distinguishable from underlying financial transactions
Estimated charge to




•
•
Seller—difference between reference price and dealer’s buying price
Buyer—difference between reference price and dealer’s selling price
Reference price—usually mid-point between buying and selling prices
Some dealers may have their own internal price
The service can also be measured by applying the dealer’s average
margin as a percentage to the value of transactions through dealers
Forex dealers often transact with one another

In this case, there is no service charge
31
Balance of Payments Division
IMF Statistics Department
Financial Services
iii) Asset management costs deducted from property income
receivable (as in the case of asset-holding entities)
•
•
•
•
Some entities have the sole or predominant function of holding
financial assets on behalf of others (e.g., mutual funds, investment
funds, holding companies, trusts, SPEs)
Their expenses can be charge explicitly or implicitly paid out of
investment income
Without recognizing these costs, the asset management
enterprises would have a negative operating surplus (=bankrupt)
The counter-entry is to increase the net investment income
receivable to the gross income, before deduction of the expenses
 Data sources:
•
ITRS or bank statements; surveys on external stocks of assets and
liabilities may also collect the explicit fees on financial transactions
32
Balance of Payments Division
IMF Statistics Department
Financial Services
 iv) Margins between interest and the reference rate on loans
and deposits:
Financial Intermediation Services Indirectly Measured (FISIM)
•
•
Change from BPM5
Actual “interest” includes element of income as well as charge for
service

•
•
Units not charged explicitly for service—hence need to be “indirectly
measured”
Interest margin used to defray cost of service and provide operating
surplus
Need to distinguish between pure interest charge (Primary income)
and the service

Actual interest (loans) =pure interest plus FISIM

Important for debt sustainability analysis (recorded as memo item)
33
Balance of Payments Division
IMF Statistics Department
Telecommunications, Computer,
and Information Services
 BPM6: New grouping of various items previously
classified separately
•
•
defined in terms of the nature of the service, not the method
of delivery
communications was a standard component in BPM5
 Telecommunications services
•
Includes: transmission of sound, images, etc., by telephone,
telex, cable, broadcasting, satellite, electronic mail, facsimile,
teleconferencing, cellular telephone services
34
Balance of Payments Division
IMF Statistics Department
Telecommunications, Computer, and
Information Services
 Computer Services
 Includes: hardware and software related services and data processing

services (see list - para 10.143)
Excludes:
•
•
•
•
Charges for licenses to reproduce or distribute software
Leasing of computers without an operator
Computer training courses not designed for a specific user
Noncustomized packaged software
 Information services
•
•
•
•
News agency services such as the provision of news, photographs,
and articles to the media
Database services—database conception, data storage, and data
dissemination
Nonbulk subscriptions to newspapers, periodicals, etc.
Library and archive services
35
Balance of Payments Division
IMF Statistics Department
Other Business Services
 Includes:
•
•
•
R&D Services
Professional and management consultancy services
Technical, trade-related, and other business services
 Research and development services (R&D)
• In BPM5, considered nonproduced asset and these transactions were
•
included in the capital account
BPM6: The results of R & D treated as produced assets (unlike BPM5) and
so outright sale transactions in them (e.g., patents, copyrights, trademarks,
industrial processes, and) included under this item
36
Balance of Payments Division
IMF Statistics Department
Other Business Services:
Research and Development
 Covers services associated with research and experimental

development of new products and processes (e.g.,in physical
science, humanitarian, commercial research, etc)
In practice, it may be difficult to differentiate the amounts
payable for the sale of proprietary rights (R&D) from the use of
proprietary rights (licenses to reproduce and licenses to use outcomes
of R&D)
•
→ charges for the use of intellectual property)
 Valuation at cost unless market value is observable
37
Balance of Payments Division
IMF Statistics Department
Other Business Services
 Professional and management services
• Legal services, accounting, management consulting, managerial services,
•
•
and public relations services; and
Advertising, market research, and public opinion polling services
Also: services for the general management of a branch, subsidiary, or
associate provided by a parent enterprise or other affiliated enterprise
 Technical, trade related, and other business services
• Includes agricultural, engineering, waste treatment and de-pollution,
•
operational leasing
Trade-related services cover commissions on goods and service transactions
payable to merchants, commodity brokers, dealers, auctioneers, and
commission agents.

Does not include merchanting (now included under goods)
38
Balance of Payments Division
IMF Statistics Department
Other Business Services:
Operating Leasing
Operating leasing
(previously operational leasing in BPM5)
•
•
•
Renting of produced assets (buildings, machinery,
equipment, etc.) but does not involve transfer of bulk of
risks and benefits of ownership
Leasing and charter of ships, aircraft, and transportation
equipment (such as railway cars, containers), without
operator or crew.
Leases for other types of goods (e.g., dwellings and other
buildings).

are included in this item, if not included in travel
39
Balance of Payments Division
IMF Statistics Department
Government Goods and
Services n.i.e.
Residual category
 Goods and services supplied by and to enclaves, such as
embassies, military bases, and international organizations
• e.g., office supplies, vehicles, repairs, rental of premises, electricity
 Goods and services acquired from the host economy by diplomats, consular
staff, and military personnel located abroad and their dependents
• e.g., also when embassy staff sells his car at the end of his stay abroad
(debit of local economy)
 Services supplied by and to governments and not included in
other categories of services
•
•
•
Technical assistance to government and public administration, and when
not classified to a specific service
Payments for police-type services (such as keeping order)
Issue of licenses to exercise some proper regulatory function (if not taxes)
 Excludes: Transactions of public enterprises
40
Balance of Payments Division
IMF Statistics Department
Direct Investment: Outline

Introduction
 Definition of direct investment
•
•
•
Fellow enterprises
Reverse investment
Indirect direct investment
 Framework of direct investment relationship
 Valuation of direct investment
 Components of Direct Investment
• Reinvested earnings
 Data collection
• Surveys
• Financial statements
• Approval of foreign investment
• Mirror data

Assets/Liabilities vs Directional Principle
41
Balance of Payments Division
IMF Statistics Department
Introduction
 Direct investment is the first of the five functional categories of

the financial account of the balance of payments and the
corresponding international investment position statement
Direct investment statistics embody 3 distinct statistical
accounts:
•
•
•
Investment positions
Financial transactions
Associated income flows between enterprises which are related
through a direct investment relationship
 International standards in DI are set out in IMF Balance of
Payments Manual, 2009 (BPM6) and 4th Edition of the OECD
Benchmark Definition of Foreign Direct Investment, 2008 (BD4)
42
Balance of Payments Division
IMF Statistics Department
Definition of Direct Investment
Components Direct Investment in IIP
Assets/Liabilities
•
Equity and investment fund shares



•
Direct investor in direct investment enterprises
Direct investment enterprises in direct investor (reverse investment)
Between fellow enterprises



if ultimate controlling parent is resident
if ultimate controlling parent is nonresident
if ultimate controlling parent is unknown
Debt instruments



Direct investor in direct investment enterprises
Direct investment enterprises in direct investor (reverse investment)
Between fellow enterprises



if ultimate controlling parent is resident
if ultimate controlling parent is nonresident
if ultimate controlling parent is unknown
43
Balance of Payments Division
IMF Statistics Department
Definition of Direct Investment
 Direct investment arises when an investor resident in one
economy (direct investor) makes an investment that gives
control or a significant degree of influence on the management
of an enterprise (direct investment enterprise) that is resident
in another economy
•
•
Control is determined to exist if the investor owns more than 50%
of the voting power in the enterprise that is resident in another
economy
A significant degree of influence is determined to exist if the
investor owns from 10 to 50% of the voting power in the
enterprise that is resident in another economy
 10 percent rule
44
Balance of Payments Division
IMF Statistics Department
Definition of Direct Investment
Direct Investor
Direct Investment
Enterprise (DIENT)
• Is the entity or group of related entities that
is able to exercise control or influence over
another entity resident in another economy
• Is the entity subject to control or influence
•In some cases, an entity may be both a direct investor and a DIENT
DIENTs can be either directly or indirectly owned by the direct
investor, and comprise:
Branches
Subsidiaries
(100 % ownership)
(Over 50% ownership) the direct investor is
able to exercise control
the direct investor is
able to exercise control
Associates
(10-50% ownership) the
direct investor is able to
exercise a significant
degree of influence, but
not control
45
Balance of Payments Division
IMF Statistics Department
Fellow Enterprises
 Fellow enterprises are:
•
enterprises under the control of the same
direct investor (Company B and Company C
share a common parent Company A)
• neither fellow enterprise controls or
influences the other fellow enterprise (that
is neither holds 10% or more voting power
in the other) - not enough or any voting
power between Company B and Company C
• residents in different economies
 Company A will be the ultimate controlling
parent (UCP)
Economy A
80%
Economy B
70%
Lend $250 m
Economy C
Liabilities- Direct investment – Debt Instruments – Between fellows – if UCP is
nonresident (economy C) = outstanding loan $250mn provided by Company B to
Company C
46
Balance of Payments Division
IMF Statistics Department
Definition of Direct Investment
Company A
15% equity
Economy 1
100% equity
Economy 2
Company B
70% equity
Company E
70% equity
Company C
Company D
< 10% equity
Economy 3
Economy 4
47
Balance of Payments Division
IMF Statistics Department
Definition of Direct Investment
 As well as the initial equity transaction that gives rise to control
or influence, direct investment also includes all subsequent
financial transactions and positions associated with this
relationship, including:
•
•
•
•
•
transactions and positions between fellow enterprises, incorporated or
unincorporated
inter company debt (except debt of selected financial intermediaries)
reverse investment
reinvested earnings
investment in indirectly influenced or controlled enterprises
 Enterprises in a direct investment relationship with each other are
called affiliates or affiliated enterprises.
48
Balance of Payments Division
IMF Statistics Department
Reverse Investment
 Reverse Investment arises when a
DIENT lends funds to or acquires equity
in its immediate or indirect direct
investor, provided it does not own
equity of 10 per cent or more of the
voting power in that direct investment
Economy A
Loan=US$200
5% equity
(75 % equity)
 Example: Economy A’s IIP Liabilities Direct Investment, Debt Instruments,
DIENT in direct investor (Reverse
investment) = US$200
 In contrast if two enterprises each have
Economy B
10 per cent or more of the voting
power in the other, there is no reverse
investment, rather there are two
mutual direct investment relationships
49
Balance of Payments Division
IMF Statistics Department
Mutual Direct Investment
•
Mutual direct investment: If Enterprise B has 10 percent or more of
the voting power in an Enterprise A (which holds 10 percent or
more of the voting power in Enterprise B), each is a DI in the other.
That is, Enterprise B is both a DIENT of Enterprise A, and a DI in
Enterprise A (Para 4.8 CDIS Guide).
Company A
Loan = US$100
Economy A
$50 equity
(50%)
$70 equity
(70%)
Economy B
Company B
50
Balance of Payments Division
IMF Statistics Department
Example 3: Mutual Direct Investment
IIP: Direct Investment (Economy A)
Assets
Liabilities
Equity and investment fund shares
Direct investor in direct investment enterprises
70
50
DIE in direct investor (reverse investment)
Between fellow enterprises
Debt instruments
Direct investor in direct investment enterprises
100
DIE in direct investor (reverse investment)
Between fellow enterprises
IIP: Direct Investment (Economy B)
Assets
Liabilities
Equity and investment fund shares
Direct investor in direct investment enterprises
50
70
DIE in direct investor (reverse investment)
Between fellow enterprises
Debt instruments
Direct investor in direct investment enterprises
100
DIE in direct investor (reverse investment)
Between fellow enterprises
51
Balance of Payments Division
IMF Statistics Department
Indirect Direct Investment
 Control or significant influence may be achieved:
• directly by owning equity that gives voting power in the enterprise,
•
or
indirectly by having voting power in another enterprise that has
voting power in the enterprise
 Direct investment relationship extends indirectly through
chains of ownership to the DIENT’s subsidiaries, subsidiaries
and associates of subsidiaries, associates and subsidiaries of
associates
 The Framework of Direct Investment Relationship (FDIR) is a
generalized methodology for identifying and determining the
extent and type of direct investment relationships
52
Balance of Payments Division
IMF Statistics Department
Framework for Direct Investment
Relationships (FDIR)
 The principles for indirect transmission of control and
influence through a chain of ownership are as follows:
•
•
•
Control can be passed down a chain of ownership as long as
control exists at each stage.
Influence can be generated at any point down a chain of
control.
Influence can be passed only through a chain of control but
not beyond.
53
Balance of Payments Division
IMF Statistics Department
Framework for Direct Investment
Relationships (FDIR)
A
Direct Investor
100%
40%
G
G
Immediate associate
B
Immediate subsidiary
70%
30%
C
Subsidiary of A
D
Associate of A
80%
E
Associate of A
100%
25%
×
FF
Not Affiliated with A
H
Associate of A
80%
J
Associate of A
20%
×
×
II
Not Affiliated with A
35%
KK
Not Affiliated with A
54
Balance of Payments Division
IMF Statistics Department
Valuation of Direct Investment
Transactions and Positions
 BPM6 recommends that market values be used to value

direct investment financial flows, income transactions
and positions
Why?
•
•
If inconsistent valuation is used, comparison between DI in
the BOP and IIP as well as with other financial investment will
be difficult.
Market valuation provides the most meaningful measure of
the economic value of resources available to, or transferred
between, economies.
55
Balance of Payments Division
IMF Statistics Department
Valuation of Direct Investment
Transactions and Positions
 BPM6 proposes 6 alternative methods to value DI

positions, when the market value is not readily available.
The CDIS Guide 2015 favors the Own Funds at Book
Value (OFBV) method for valuing unlisted (or unquoted)
equity and other equity:
OFBV =
(a) paid-up capital +
(b) all types of reserves in the balance sheet identified as
equity +
(c) cumulated reinvested earnings +
(d) holding gains/losses
56
Balance of Payments Division
IMF Statistics Department
Components of Direct investment
in Financial Account
Direct investment position comprise two types of financing:
(i) equity and investment fund shares, of which reinvestment of earnings and
(ii) inter-company debt
Equity
Listed Equity: shares traded on
an exchange
Unlisted Equity: shares that are
privately held
Other Equity: not in the form of
securities, can include equity in
quasi-corporations such as
branches, trusts, notional units
Investment fund shares
Debt instruments
Collective investment
undertakings through
which investors pool funds
for investment in financial
or non financial assets or
both
Debt instruments are those
instruments that require
payment of principal and
interest at some points in the
future
57
Balance of Payments Division
IMF Statistics Department
Classification Structure:
Components of Direct Investment (BOP and IIP)
Direct investment
NAFA (BOP)
Assets (IIP)
NIL (BOP)
Liabilities (IIP)
Equity and investment fund shares:
Equity other than reinvestment of earnings (BOP)/ Equity and investment fund shares (IIP)
Direct investor in direct investment enterprises (DIENT)
DIENTs in direct investor (reverse investment)
Between fellow enterprises
if ultimate controlling parent is resident
If ultimate controlling parent is nonresident
If ultimate controlling parent is unknown
Reinvestment of earnings (only in BOP)
Debt instruments
Direct investor in DIENT
DIENTs in direct investor (reverse investment)
Between fellow enterprises
if ultimate controlling parent is resident
If ultimate controlling parent is nonresident
If ultimate controlling parent is unknown
58
Balance of Payments Division
IMF Statistics Department
Direct Investment Earnings
 Direct investment earnings measure earnings from current
operations
 Direct investment earnings must be calculated before holding
gains or losses
 Earnings of DIENTs reported using the Current Operating
Performance Concept should exclude:
•
•
•
•
•
•
•
Gains or losses arising from valuation changes, disposal of assets
or liabilities
Gains or losses on assets from closure of all or part of business
Write off of intangible assets
Extraordinary gains or losses due to catastrophic event
Write-off of research and development
Exchange rate gains and losses
Unrealized gains or losses from revaluation of assets
59
Example 4: Reinvested Earnings
Balance of Payments Division
IMF Statistics Department
Profit and Loss Statement of Enterprise A. Nonresidents DI own 50 percent of the equity of A
1. Sales of finished goods
+ increase in inventories of finished goods
20.000
500
2. Transport services provided
3.000
3. Repair services
6.000
4. Dividends
3.000
5. Interest on bonds
1.000
6. Profit on sale of property
1.000
7. Total revenue (1 through 6)
34.500
8. Raw materials purchased
12.000
– increase in inventories of materials
2.000
9. Salaries and wages
5.000
10. Office rental
11. Travel of employees
12. Fuel, electricity, other costs
500
2.000
500
13. Depreciation
1.000
14. Interest on loans
1.000
15. Bad debt provisions
2.000
16. Total expenses (8 through 15)
22.000
17. Net income (before taxes)
12.500
18. Taxes on income
4.000
19. Net income (after taxes)
8.500
20. Dividends payable
5.000
60
Balance of Payments Division
IMF Statistics Department
Example 3: Reinvested Earnings - Enterprise A
Net income after taxes (line 19)
+8.500
– dividends (line 20)
-5.000
3.500
– revenue not part of output, primary income or secondary income:
holding gains (line 6)
-1.000
+ expenses not being a transaction
bad debt provisions (line 15)
+2.000
Reinvested earnings
4.500
Reinvested earnings of the direct investor: 4,500 * 0.5
2.250
Current Account
Credit
Primary Income- Investment Income. Direct Investment
Income on equity. Reinvested earnings
Financial Account
Direct Investment. Equity
Reinvestment of earnings
Debit
2.250
NAFA
NIL
2.250
61
Balance of Payments Division
IMF Statistics Department
Where and How to Collect Direct
Investment Data?
 Major Data Sources
Surveys
•Direct
investment
specific
surveys is the
most efficient
approach,
collecting
data from
respondents
consistent to
international
statistical
standards
Financial
Statements
•Data on
position can
be sourced
from balance
sheets and
income
transactions
from income
and
expenditure
account
ITRS
•Many
countries are
relying on an
international
transactions
reporting
system that
become
available
from banking
records
Foreign
Investment
Approvals
•National
Agencies
responsible for
approving or
regulating
inward direct
investment
activities
•They may also
facilitate
residents’
direct
investment
abroad
Mirror/Derived
Data
•The IMF
Coordinated
Direct
Investment
Survey (CDIS)
provides
direct
investment
position by
counterpart
economies for
participant
countries
62
Balance of Payments Division
IMF Statistics Department
Direct Investment Specific Surveys
 The BPM6 Compilation Guide presents two different forms,


which may serve as starting point for designing the direct
investment questionnaire
Model Form 17 of the BPM6 Compilation Guide, pp. 554-563
Form 17 collects financial cross-border assets and liabilities, of
which direct investment, in a reconciliation statement
• Data are requested separately for positions, both opening and
closing and reasons for change between the two positions –
transactions and other changes
• In addition, the form includes investment income linked to the
corresponding position data, withholding taxes and explicit
fees and charges on the transactions
63
Balance of Payments Division
IMF Statistics Department
Direct Investment Specific Surveys
 Model Form 18 of the BPM6 Compilation Guide, pp. 564-578
 Its tailor made to collect data on direct investment only
• This survey form collects other direct investment-related
information that can be used for analytical purposes and for
quality control
 In both model forms 17 and 18, direct investment assets and
liabilities are separately identified, in line with BPM6, to show
the relationship of:
•
•
•
Direct investors in direct investment enterprises
Direct investment enterprises in direct investors (reverse
investment)
Between fellow enterprises
64
Balance of Payments Division
IMF Statistics Department
Steps After the Surveys
 Drawing data from surveys: the compiler is likely to be

concerned with non-response
There are several ways to deal with non response, of which
Approaches to deal with nonresponse
• company financial statements
• use of ITRS for large transactions to add to
previous stock
For economies that have
conducted surveys before
•carry forward techniques using earlier surveys
For economies where surveys
have not been previously
conducted
• Raising factor (crude method) = multiplying
survey data by volume of companies
surveyed divided by number of respondents
65
Balance of Payments Division
IMF Statistics Department
Grossing Up the Survey Results
Expanding results from a selection
of respondents to measure
the population as a whole
 How does the compiler expand the sample or gross-up the
survey results to the population?
•
•
Weighing techniques – applying expansion factors to the sample
response
More advanced technique – stratified expansion, where the
raising factor used take into consideration the characteristics of
the number of units surveyed in the sample vis-à-vis units of same
characteristics in the population
66
Balance of Payments Division
IMF Statistics Department
Example of Grossing Up:
Using Survey of Large Entities
 Country X conducts a sample survey of large entities (LEs)



(which are DIENTs of foreign owned companies)
A sample representing 80% of the population of LEs are targeted
in the survey. The common characteristic for this sample is they
are all managing assets let’s say US$100 million
However, at submission deadline and after several follow-ups,
out of the 20 entities surveyed, only 15 responded. The
consolidated assets of the 15 entities equal US$1,200 million
out of which direct investment assets amounted to US$600
million
Now how does the compiler go about to use the survey results to
incorporate in the IIP?
67
Balance of Payments Division
IMF Statistics Department
Example of Grossing Up:
Using Survey of LEs
 First, the compiler has to account for non-response:
 To gross up to the sample, the compiler can use a simple raising
factor
RF =
Number of units reported = 15
Total number of units in sample = 20
= 0.75
 In this case , direct investment assets for the sample will be grossed
up to




600
x
1
RF
=
600 x
1
0.75
=
800
Second, the compiler has to expand the sample to the population
Given that the sample represents 80% of the population:
Direct Investment Assets = 800 x 1/0.8 = 1,000
The compiler will therefore after the two steps include US$1,000 in
the IIP
68
Balance of Payments Division
IMF Statistics Department
Financial Statements
 Financial statements can provide useful data for



deriving/estimating direct investment transactions and
obtaining positions
Income statements may provide direct investment
income data but may not give out a residency-based split
(resident/nonresident) to allow ready identification
In that case notes to the financial statement can provide
a cue to the compilers for both direct investment
transactions and position data
In some countries, data on direct investment debt
instruments can be sourced from a registry of external
loans used to track private sector external debt
69
Balance of Payments Division
IMF Statistics Department
How to Read Direct Investment Liability
Position from a Balance Sheet?
Balance Sheet of XYZ Company as on 31st December 2014 (DIE of XYZ International)
Liabilities
Reserves
Eq. Share Capital
Pr. Share Capital
Reserves and Surplus
Capital Reserve
General Reserve
Share Premium
Retained Earnings (P/L
Appr)
Other Reserves
Long Term Loans
Fixed Deposits Collected
Debentures
Provisions for Taxation
Provisions for Dividends
Outstanding Expenses
Pre received Incomes
Unclaimed Dividends
Sundry Creditors
Bills Payable
Bank Overdraft
Amount
35,000,000
12,000,000
6,000,000
12,000,000
3,500,000
43,500,000
4,000,000
54,000,000
16,000,000
24,000,000
3,000,000
4,000,000
5,000,000
2,000,000
200,000
13,000,000
12,000,000
5,000,000
Reinvested earnings
Assets
Goodwill
Land
Buildings
Plant and Machinery
Furniture and Fittings
Motor Vehicles
Patents, Trade Marks, Copyrights
Investments
Stock of Raw Material
Work in Progress
Finished Goods Stock
Prepaid Expenses
Incomes Receivable
Paid-up Capital
Sundry Debtors
Cash
Bank Balance
Loans and Advances
Bills Receivable
Deferred Revenue Expenditure
Miscellaneous Expenses
Discounts to be written off
Accumulated Loss
(P/L Appr a/c debit balance)
254,200,000
Amount
8,000,000
35,000,000
27,000,000
15,000,000
25,000,000
35,000,000
18,000,000
24,000,000
2,500,000
2,400,000
3,000,000
4,000,000
3,000,000
26,000,000
1,160,000
6,000,000
15,000,000
54,000,000
1,200,000
2,400,000
254,200,000
70
Balance of Payments Division
IMF Statistics Department
How to Use the Financial Statements:
an Illustration for Equity Investment
 The compiler may be able to estimate the direct investment position from the
shareholders’ equity portion of the balance sheet which may include:
XYZ International Corporations
Balance Sheet
As at December 31, 2014 (US$)
Shareholders’ Equity
12,600,000
(1) Paid up capital
4,700,000
(2) All types of reserves identified as equity in the
B/Sheet
2,550,000
(3) Cumulated reinvested earnings
4,350,000
(4) Holding gains/ losses
-
100 percent direct investor shareholding = US$ 12.6 million
50 percent direct investment shareholding = US$ 6.3 billion (50%*12.6)
71
Balance of Payments Division
IMF Statistics Department
Approval/Licensing of Foreign Investment
Advantages:
•In some economies, these regulatory bodies may ask for the
provision of all required financial information on an ongoing
basis
•Can always help to update business register
•Useful for identifying nonresidents who invest in real estate
The serviceability of such data for direct investment is
limited:
•Regulation not set up with statistical requirements in mind
•Intended investment recorded, actual investment may not
take place.
•Significant lags between intent and actual
•May capture only new direct investment relationship, ignore
non equity transactions like inter company lending
•Approving of certain key sectors like petroleum, banks may not
lie with the promotion agency
72
Balance of Payments Division
IMF Statistics Department
Mirror/Derived Data
 CDIS Table 3 – presents mirror direct investment position
 Data on inward direct investment positions reported by an
economy are shown side-by-side against data on outward
direct investment positions reported by the counterpart
economy (i.e., mirror data for inward data reported)
 Similarly, data on outward positions reported by an economy
are shown side-by-side against data on inward positions
reported by the counterpart economy
73
Balance of Payments Division
IMF Statistics Department
Mirror/Derived Data
 Usefulness of mirror data:
• For countries that do not participate in CDIS, mirror data as
reported by their counterparts can provide insights on their
total inward and outward direct investment positions
(directional principle)
 Direct use of these data for partner economies could
need some adjustments
•
because the absence of data from some counterpart
economies:


•
they are not reporting economies or
they do not provide data with some partners to preserve
confidentiality
Compiler must re-arrange from inward/outward to
assets/liabilities presentation
74
Balance of Payments Division
IMF Statistics Department
Mirror/Derived Data
 Usefulness of mirror data:
•
For economies that participate in the CDIS,
mirror data could be used:

to cross check and verify their own estimates and

may also be very useful in highlighting data gaps or
errors at counterpart economy level
75