## Chapter 7 Balance Sheet: International Investment Position

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### Concepts and coverage (BPM7 Chapter 7)
- The international investment position (IIP) shows at a point in time the value and composition of:
  - (a) financial assets of residents that are claims on nonresidents and gold bullion held as reserve assets, and
  - (b) liabilities of residents to nonresidents (7.1).
- Net IIP = external financial assets − external liabilities; it may be positive or negative (7.1).
- The IIP is a subset of the national balance sheet; net IIP + value of nonfinancial assets = net worth of the economy (7.2).
- The IIP is a point-in-time statement (opening or closing value). Changes between opening and closing positions are explained through accumulation accounts comprising:
  - financial account transactions (balance of payments financial account), and
  - other changes in financial assets and liabilities (revaluations and other changes in volume) (7.3, 7.5).
- Chapter covers coverage, presentation, classification, timing, valuation, and relationship to accumulation accounts (7.4).

### Integrated IIP presentation and analytical enhancements
- Integrated IIP presentation options and uses:
  - Table 7.1: structure by functional category and broad financial instruments; links to accumulation accounts (transactions; other changes in financial assets and liabilities) (7.5).
  - Table 7.2: breakdown by resident institutional sector and functional category; resident sector refers to domestic holder/issuer (7.5–7.6).
- Analytical enhancements encouraged:
  - Currency composition analyses and remaining maturity analyses (7.7).
  - Memorandum and supplementary tables presenting:
    - currency composition of assets and liabilities by sector with breakdown by principal foreign currencies including the U.S. dollar, euro, yen, and others,
    - breakdown by original maturity,
    - remaining maturity of long-term debt liabilities with sector breakdown (7.7–7.8).
- Granular integrated IIP data (transactions, revaluations, other changes in volume) are particularly useful for analyzing net IIP dynamics; separate reporting of (a) debt cancellation and write-offs, and (b) reclassifications under other changes in volume, is encouraged as supplementary items (7.8).

### Structure of the integrated IIP (Table 7.1 and Table 7.2 summary)
- Components and presentation elements:
  - Opening IIP; accumulation accounts (transactions from BOP financial account; other changes in financial assets and liabilities split into revaluations and other changes in volume, with exchange rate changes and other price changes and subitems such as debt cancellation and write-offs and reclassifications); closing IIP (Table 7.1).
  - Assets by functional category: direct investment; portfolio investment; financial derivatives (other than reserves) and ESOs; other investment; reserve assets (Table 7.1).
  - Assets by instrument: equity and investment fund share/units; debt instruments; monetary gold; financial derivatives and ESOs; special drawing rights; currency and deposits; debt securities; loans; insurance, pension, standardized guarantee schemes; other accounts receivable/payable; other financial assets and liabilities; total assets (Table 7.1).
  - Table 7.2: beginning- and end-of-period assets and liabilities by sector (Total economy; Households and NPISHs; General Government; Financial corporations; Nonfinancial corporations), by functional category and instrument; accumulation accounts broken down similarly; memorandum items include fair value of loan assets (or nominal value of nonperforming loan assets), short-term reserve-related liabilities, and currency composition (Table 7.2 note).

### Classification dimensions and consistency (7.12–7.13)
- Classification dimensions for the integrated IIP include:
  - (a) Functional category: direct investment; portfolio investment; financial derivatives (other than reserves) and employee stock options (ESOs); other investment; reserve assets (7.12).
  - (b) Financial instrument: equity and investment fund shares/units; debt instruments; other financial assets and liabilities (full breakdown per Chapter 5) (7.12).
  - (c) Institutional sector of resident party: central bank; deposit-taking corporations except the central bank; general government; other financial corporations; nonfinancial corporations; other sectors (split between other financial corporations and remaining nonfinancial subsectors including households and NPISHs) (7.12).
  - (d) Maturity (for debt instruments): short-term or long-term, by original and remaining maturity (paragraphs 5.103–5.105) (7.12).
  - (e) Currency: domestic or foreign currency (paragraphs 3.95–3.97 for debt; 3.100 for equity); for financial derivatives, currency to receive or pay foreign currency (paragraph 5.108) (7.12).
  - (f) Interest rate structure (for debt instruments): variable- or fixed-rate (paragraphs 5.109–5.114) (7.12).
- A consistent classification and level of detail should be used across IIP, financial account transactions, and other changes in financial assets and liabilities to facilitate comprehensive analysis and estimation of rates of return; instrument and sector detail aids linkage with monetary and financial statistics (7.13).

### Direct investment and valuation of unlisted and other equity (7.14–7.16-1)
- Direct investment presentation:
  - Follows paragraphs 6.8–6.24; standard components presented by instrument (equity and debt) and resident institutional sectors; directional principle presentation may be used supplementarily (6.42–6.45) (7.14).
- Valuation rules for equity:
  - Listed equity: valued at current market prices when regularly traded (7.15).
  - Unlisted or illiquid equity (direct investment enterprises, private equity, unlisted/delisted, joint ventures, unincorporated enterprises): require estimation of market-equivalent prices (7.15).
- Three preferred methods for estimating market value of unlisted equity (methods are not ranked; choice depends on circumstances) (7.16):
  - (a) Own funds at book value (OFBV): sum of paid-up capital (excluding shares the enterprise holds in itself, including share premium), all types of reserves identified as equity (including investment grants when considered reserves), cumulated reinvested earnings, and holding gains/losses included in own funds; frequent revaluation (at least annual) improves approximation to market values (7.16(a)).
  - (b) Recent transaction price: prices from trades within the past year may be used if no material change since transaction date; usefulness declines as time passes and conditions change (7.16(b)).
  - (c) Market capitalization or Price to book Value (P/B): adjust book values at aggregate level using ratios based on listed companies with similar operations or revalue cost-carried assets using suitable asset price indices (7.16(cb) / 7.16(d) references).
- Additional valuation approaches and guidance (7.16-1):
  - Net asset value: appraisals by management, directors, or independent auditors to obtain total assets at current value less total liabilities at market value; valuations should be recent (within the past year) and preferably include intangible assets (7.16-1(a)).
  - Present value and price-to-earnings ratios: discount forecast future profits or apply market/industry price-to-earnings ratios to smoothed recent earnings; exclude one-off factors (7.16-1(c)).
  - Market capitalization method: collect OFBV and adjust with ratios based on market capitalization to book value for listed peers or revalue cost-carried assets by asset price indices (7.16-1(d)).
- Compilers should maintain transparency and state clearly the methods used; BPM7 Compilation Guide will provide practical guidance and a decision tree for valuation of unlisted equity (7.16-1).

### Apportioning global values and less suitable data (7.17–7.18)
- Apportioning global market value of enterprise groups:
  - Use listed company market price when available; apportion to economies on the basis of indicators such as sales, net income, assets, or employment assuming the ratio of net market value to the indicator is constant across the transnational enterprise group (warning: each indicator could yield significantly different results) (7.16 section).
- When current market prices are not directly observable (7.17):
  - Possible inputs include cumulated flows or a previous balance sheet adjusted by subsequent flows; these should be adjusted for subsequent price developments using aggregate share price or asset price indexes and taking exchange rate movements into account.
  - "The use of unadjusted summing of past transactions should not be used is not recommended." (7.17)
- Choice of method should consider availability of information and which available method best approximates market values; "a standard ranking of the alternative methods is not proposed." Compilers should be transparent (7.18).

### Negative equity positions (Box 7.1)
- Recording negative equity:
  - Recommended to record negative equity positions for unlimited liability entities if valuation methods for unlisted equity result in such values (Box 7.1).
  - For limited liability entities: recommended to record negative equity positions as the default option and only zero out negative positions in specific cases where shareholders’ and affiliates’ liability is strictly limited (Box 7.1).
- Definition and implications of strictly limited liability:
  - Shareholder would not suffer any other direct economic losses than the existing equity investment in case of bankruptcy and would not be likely to take on any financial obligations due to absence of implicit guarantees or significant reputational risks.
  - "It can generally be assumed that implicit guarantees or significant reputational risks exist when a shareholder’s ownership share is at least 10%." (Box 7.1)
- Additional guidance:
  - Negative equity positions in public corporations and central banks should never be zeroed out.
  - Compilers are encouraged to show negative equity positions as supplementary “of which” items under equity assets and liabilities.
  - Ensure stock-flow consistency through recording of revaluations rather than other changes in the volume of financial assets and liabilities if negative equity is zeroed out.
  - Footnote: "In case some shareholders are zeroed out while others are not, the latter would only record negative equity proportional to their ownership share."

### Intercompany borrowing, pass-throughs, quasi-corporations, and owners’ claims
- Intercompany borrowing and pass-throughs (7.20–7.21):
  - Borrowing entity records liability; creditors record a claim on the entity that directly undertakes the borrowing, not on the enterprise that ultimately receives the funds or makes the guarantee (7.20).
  - When funds raised are passed on to an affiliated enterprise, the initial borrowing entity has a claim on the affiliated enterprise, assumed to give rise to a loan unless evidence indicates a debt security or equity (7.21).
  - Applies to pass-through funds, conduits, SPEs and similar legal structures; such investment often is reverse investment or investment between fellow enterprises (7.21).
- Quasi-corporations and owners’ claims (7.23–7.25):
  - Owners are shown as having a claim on the institutional unit (quasi-corporation), not as directly owning the various individual assets (7.23).
  - Owners’ claims on quasi-corporations resident in other economies are usually classified as direct investment (7.24); rare cases with equity less than 10 percent may be classified as other investment—other equity and equity in international organizations (7.24).
  - Valuation of equity in quasi-corporations: equity equal to market value of quasi-corporations’ assets less market value of liabilities other than equity, or use direct investment equity valuation methods (7.25).

### Intercompany lending in debt securities and portfolio investment specifics
- Intercompany lending in debt securities:
  - Basic valuation method is market value; compilation at nominal value can be provided as a supplementary item where direct investment impact is significant (intercompany lending section).
  - Refer to "Additional Analytical Position Data" in Annex 14 for further details.
- Portfolio investment equity and debt specifics:
  - Dividends declared but not yet paid are included in share price before ex-dividend date and become accounts receivable/payable after shares go ex dividend (7.26).
  - Accrued interest on debt securities is included in the outstanding amount and should not be reported separately; "dirty price" includes accrued interest, "clean price" excludes it (7.27).
  - Short positions recorded as negative assets to reflect economic ownership and avoid double counting; short positions arise from selling securities not economically owned and using borrowed securities for delivery (7.28, 7.28-1).
  - Unlisted portfolio investment equity securities without observable market price may be valued using methods discussed for direct investment equity; listed debt securities with no quoted prices can be estimated by discounting future cash flows (7.29).

### Debt securities valuation, nominal values, and reconciliation (7.30–7.31)
- Basic valuation for debt securities is market value; compilation at nominal value is encouraged as a supplementary item (7.30).
- Nominal value definition: present value of amounts owed to creditors (sum of funds originally advanced, plus subsequent advances, plus accrued interest, less repayments) (7.30).
- Manual emphasizes compiling a table reconciling nominal and market valuation of debt securities liabilities as part of “Additional Analytical Position Data” in Annex 14 (7.30).
- Zero-coupon bonds: single payment at maturity; sold at discount; accrual of interest discussed in paragraph 11.55 and Box 11.2 (7.31).
- Deep-discount bonds: small or no coupon payments, issued at considerable discount; accrual discussed in paragraph 11.56 (7.32).

### Financial derivatives (other than reserves) and employee stock options (ESOs) (7.33–7.39)
- Valuation and recording:
  - Financial derivatives and ESOs valued at market prices prevailing on balance sheet recording dates; if unavailable, other fair value methods (option models, present values) may be used (7.33).
  - Payments before contract expiry (e.g., interest swaps) record change in contract value as transactions (7.33).
- Options, warrants, swaps, and credit default swaps:
  - Options/warrants: market value or estimated cost to buy out option holder’s rights; counterpart liability attributable to writer/issuer is valued at current cost of buying out rights (7.34–7.35).
  - Forward-type contracts: recorded at market value; changes upon settlement recorded as transactions (7.35).
  - Swap contract value derived from appropriately discounted difference between expected receipts and payments; credit default swap value is difference between present value of premium payments and estimated present value of potential payments in event of default (7.35).
- Derivatives positions, notional values and revaluations (7.36–7.38):
  - Forward-type derivatives can switch from asset to liability positions without settlement payments; previous gross positions revalued to zero and new gross positions revalued from zero to market value (7.36).
  - Gross asset and liability data compiled by summing individual contracts in asset and liability positions; financial derivatives reported separately for assets and liabilities (7.37).
  - Notional values defined as amount underlying a derivative contract necessary for calculating payments or receipts; may or may not be exchanged (7.37).
  - Value changes in financial derivatives are classified as revaluations and included in other changes in financial assets and liabilities account (7.37-1).
  - Cumulation of transactions should never be used to estimate derivative positions because positions emerge largely from revaluations (7.38).
- Employee stock options (ESOs):
  - Valued consistently with cumulated compensation until vesting date; thereafter valued at market prices (7.39).
  - ESOs can be measured from market value of equivalent options or by options-pricing models such as Black-Scholes (7.39).

### Other investment — nominal valuation, impairment indicators, and supplementary items (7.40–7.56)
- Valuation principle:
  - Nonnegotiable instruments (loans, deposits, other accounts receivable/payable) primarily valued at nominal value as defined in paragraph 3.88 (7.40).
  - Unlisted other equity and equity in international organizations may use unlisted equity valuation methods (7.40).
  - Accrued interest not yet paid included in outstanding amount; includes FISIM accrued and not yet paid (7.41).
  - Nominal values are not adjusted for expected losses or interest rate changes; market value may differ due to market interest rate changes and repayment risk (7.42).
- Rationale for nominal valuation: pragmatic data availability, consistency in reporting by debtors and creditors, nominal valuation shows actual legal liability and starting point of creditor recovery behavior (7.43).
- Concessional loans valued at nominal value based on contractual interest rate (7.43-1).
- Reduction of nominal value possible by write-off, restructuring, or debt forgiveness; liabilities canceled or written off by creditor as uncollectible; formal debt reorganization extinguishes old liability and creates new liability (7.44).
- Evidence of loan deterioration due to publicly known events can warrant value reset beyond bankruptcy/liquidation; BPM7 Compilation Guide will provide guidance (7.44-1).
- Supplementary memorandum items for loans where nominal value can be incomplete when instruments are impaired (7.45–7.46):
  - (a) fair value,
  - (b) nonperforming loans,
  - (c) loan loss (bad debt) provisions.
  - Fair value shown as memorandum item for creditors; if not available, nominal value of nonperforming loans provided as memorandum item (7.46).
  - Nonperforming loans and loan loss provisions may be supplementary items; similar indicators for deposits and trade credit where significant (7.47, 7.55).
- Metadata on definitions and sources for impairment indicators are important; more prescriptive guidance may be provided as accounting procedures standardize (7.56).

### Fair value, nonperforming loans, and loan loss provisions (7.48–7.54)
- Fair value of loans:
  - Defined as amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction (7.48).
  - Preferred indicator of loan impairment effect; shown as memorandum item for assets where available (7.48).
  - Calculation takes into account expected loan losses and, for fixed-rate loans, changes in market interest rates; practical availability limited by business accounting practice (7.49).
- Nonperforming loans:
  - Defined as loans where (7.50):
    - (a) payments of interest and/or principal are past due by 90 days or more, or
    - (b) interest payments equal to 90 days or more have been capitalized or delayed by agreement (reinvested into the principal amount), or
    - (c) evidence exists to reclassify a loan as nonperforming even in the absence of a 90-day past due payment (e.g., debtor files for bankruptcy).
  - Nonperforming loans recorded at nominal value, including accrued interest not yet paid; remain nonperforming until written off, forgiven, reorganized, or become performing loans (7.51).
  - The three-month (or 90-day) criterion is most widely used; nominal value of nonperforming loan assets is a memorandum item when loan assets at fair value are not available (7.52).
  - Replacement loans from rescheduling or refinancing that comply with supervisory guidance and are complied with by the debtor are not classified as nonperforming (7.53).
- Loan loss (bad debt) provisions:
  - Internal accounting entries by creditors to account for possible loan losses; may indicate difference between nominal and fair values (7.54).
  - Provisions are not treated as liabilities in the ESS because they are not legal contractual obligations associated with a liability; approaches differ between enterprises and economies (7.54).
  - Provisions may differ from actual losses due to collateral or expectations about future defaults (7.54).

### Financial leases, reverse transactions, repos, and short-term technical items (7.57–7.62)
- Financial leases:
  - Treated to capture economic reality: goods under a financial lease treated as purchased and owned by the user; lease shown as a loan from lessor to lessee financing acquisition of fixed asset (7.57).
- Reverse transactions (repos, securities lending, gold swaps):
  - Change of legal ownership with commitment to repurchase same or similar assets does not change economic ownership; no transaction in the asset is recorded—ownership in the IIP unchanged (7.58).
  - If cash is supplied in a reverse transaction, arrangement regarded as a loan or deposit; gold swap for cash treated analogously as a loan with gold as collateral (7.59).
  - Custodian data may not identify repurchase agreements and can pose attribution problems (7.60).
  - If recipient on-sells securities received under reverse transaction to a third party, it has a short position (7.61).
  - Repurchase agreements, securities lending with cash collateral, and margin lending can be used to obtain short-term financing; separate information on these loans may be provided as an “of which” supplementary item under loans to analyze liquidity transformation and leverage creation (7.61-1).
- Overnight deposits (sweep accounts):
  - Positions should be measured after funds are moved at the end of the day to ensure consistency between interest flows and positions; timing can substantially affect statistical aggregates (7.62).
  - Major data users are interested in size and location of these stocks and flows for risk assessment (7.62).

### Insurance technical reserves, pension entitlements, and provisions for calls under standardized guarantees (7.63–7.64-1)
- Components of reserves and entitlements (7.63):
  - (a) Nonlife insurance technical reserves: prepayment of insurance premiums less service charges and reserves for outstanding claims (reported and incurred but not reported); equalization reserves for events that have occurred included, reserves for events not occurred excluded.
  - (b) Entitlements of beneficiaries under life insurance policies and pension schemes.
  - (c) Provisions for calls under standardized guarantees.
- Insurance technical reserves, pension and annuity entitlements, and provisions for calls under standardized guarantees are liabilities of insurance companies and pension funds and assets of policyholders and beneficiaries (7.64).
- Cross-border importance:
  - Cross-border insurance reserves may be significant for major insurance service exporters/importers and for economies with large temporary cross-border worker or retiree flows (7.64).
  - Insurance technical reserves may be classified as direct investment in cases discussed in paragraph 6.27 (7.64).
- Islamic insurance (Takaful) and re-insurance (Re-takaful) discussion included in Chapter 17 Islamic Finance, including reserves and similarities/differences with conventional insurance (7.64-1).

### Pension entitlements: defined contribution and defined benefit schemes (pension section)
- Defined contribution scheme:
  - Benefits defined exclusively by funds built from contributions and investment returns; entire risk borne by beneficiary employee.
  - Liability of scheme and corresponding assets of beneficiaries equal to current market value of fund assets, including any claims on sponsor or employer.
  - Defined contribution plans are always funded.
- Defined benefit scheme:
  - Benefits determined by actuarial formula; liability calculated by estimating present value of promised future benefits using actuarial estimates.
  - Benefits to policyholder are guaranteed; scheme may be (partially) funded or unfunded.
- Measurement approaches:
  - Calculation of pension entitlements may be direct or actuarial.
  - Obligations of unfunded pension schemes recognized as liabilities based on actuarial estimates of accrued liability.
  - Potential payments by social security schemes are not recognized as financial assets or liabilities.

### Reserves: valuation, SDRs, and reserve-related liabilities (reserves section)
- Valuation at reference dates:
  - Reserve assets valued primarily at current market prices; monetary gold at prevailing market price; SDRs at market rates calculated by the IMF; deposits and loans at nominal values (reserves valuation).
- SDRs and net IIP effects:
  - SDR holdings are a reserve asset.
  - Allocation of SDRs to IMF members is shown as incurrence of a liability by recipient and included in other investment.
  - For an economy that holds only its original allocation, reserve assets increase by the value of SDR holdings, but net IIP is unchanged (reserves section).
- Reserve-related liabilities:
  - Shown as a memorandum item to the IIP on a short-term (remaining maturity) basis; defined in paragraphs 6.115–6.116 (reserves section).
- Presentation of foreign currency positions:
  - Comprehensive picture of foreign currency assets and liabilities of monetary authorities and central government, including positions with residents and nonresidents, can be presented according to the format in Table V in Annex 14.

### Sovereign funds, off-balance-sheet items, and contingent liabilities
- Sovereign wealth / special purpose government funds:
  - Some assets of these funds may be included in reserve assets or other functional categories; where significant, foreign assets of the special purpose government fund not included in reserve assets can be shown separately as supplementary items (reserves section).
- Off-balance-sheet items and contingent liabilities:
  - Certain actual and potential obligations are not recognized as liabilities in the IIP (examples: potential liabilities under one-off guarantees, unfulfilled loan commitments, other explicit contingent liabilities).
  - If obligations to nonresidents are significant, compilers should provide supplementary data in terms of the maximum exposure loss by type of contingent liability.

### Positions and transactions with the IMF: quotas, reserve position, and operational features
- Quota subscription components:
  - Foreign exchange component: a member is required to pay 25 percent of its quota in SDRs or in foreign currencies acceptable to the IMF; this 25 percent portion is a component of the member’s reserve assets and shown as a transaction involving a reduction in other reserve assets (credit) offset by an increase in the reserve tranche position in the IMF (debit) (quota section).
  - Domestic currency component: the other 75 percent of the quota is payable in the member’s own currency at a designated depository, normally the member’s central bank; payment made either in domestic currency (IMF No. 1 and No. 2 Accounts) or by issuance of a promissory note (IMF Securities Account) (quota section).
  - The domestic portion of the quota payment is not recorded in the member’s balance of payments or in the IIP, except for the No. 2 account; no interest is payable on either the deposit account or the note (quota section).
- Reserve position in the IMF and operational use:
  - Reserve position equals sum of reserve tranche plus any indebtedness of the IMF in the General Resources Account that is readily available to the member; reserve tranche created by foreign exchange portion of quota subscription plus increases/decreases through IMF sale/repurchase of members’ currency (reserve position section).
  - Using the reserve tranche: member purchases foreign exchange from the IMF with domestic currency when in balance of payments need; transaction recorded as reduction in reserve tranche offset by increase in other reserve assets (reserve position section).
- Credit and loans from the IMF; classification:
  - IMF credit and PRGF loans are classified as loans under other investment (IMF credit section).
  - PRGF loan results in member borrowing foreign exchange with commitment to repay; does not affect IMF No. 1 Account.
  - IMF credit: member “purchases” foreign exchange from IMF in return for domestic currency; use of IMF credit shown as member’s liability (in SDRs) in balance of payments and IIP; liabilities extinguished when member uses foreign exchange to repurchase domestic currency.
- Maintenance of value and other IMF operational features:
  - Maintenance of value payments: for IMF credit use, if domestic currency value changes relative to SDR, maintenance of value payments made once a year in No. 1 Account in domestic currency to maintain constant SDR liability; maintenance of value payments not entered as transactions in the balance of payments (maintenance section).
  - Members’ credit to the IMF: members may extend credit or make loans to the IMF not part of Reserve position.
- Remuneration, No. 2 Account, and SDR institutional treatment:
  - IMF pays remuneration quarterly on basis of reserve tranche position; remuneration classified on accrual basis as investment income–reserve assets–interest (credit), offset by increase in reserve assets (debit) (remuneration section).
  - No. 2 Account is reflected in the balance of payments of a member as a liability; transactions involving No. 2 Account recorded as increases or decreases in this liability offset by source or use of funds (No. 2 Account section).
  - SDR institutional details: SDR administered by SDR Department; SDR is not a claim on the IMF; SDR allocations received by a country are reported as liabilities under other investment and reserve-related liabilities; SDR holdings are classified as reserve assets (SDR section).

*Source: BPM7 Chapter 7, "Balance Sheet: International Investment Position" (IMF Manual excerpt).*

### Chapter 7 Balance Sheet: International Investment Position

### Chapter 7 Balance Sheet: International Investment Position

### Concepts and coverage (BPM7 Chapter 7)
- 7.1: The international investment position (IIP) shows at a point in time the value and composition of:
  - (a) financial assets of residents that are claims on nonresidents and gold bullion held as reserve assets, and
  - (b) liabilities of residents to nonresidents.
- Net IIP = external financial assets − external liabilities; it may be positive or negative (7.1).
- 7.2: The IIP is a subset of the national balance sheet; net IIP + value of nonfinancial assets = net worth of the economy.
- 7.3–7.5: The IIP is a point-in-time statement (opening or closing value). Changes between opening and closing positions are explained through accumulation accounts comprising:
  - financial account transactions (balance of payments financial account), and
  - other changes in financial assets and liabilities (revaluations and other changes in volume) (7.3, 7.5).
- 7.4: Chapter covers coverage, presentation, classification, timing, valuation, and relationship to accumulation accounts.

### Integrated IIP presentation and analytical enhancements
- 7.5–7.6: Integrated IIP presentation options:
  - Table 7.1: structure by functional category and broad financial instruments; links to accumulation accounts (transactions; other changes in financial assets and liabilities).
  - Table 7.2: breakdown by resident institutional sector and functional category (resident sector refers to the domestic holder/issuer) (7.5–7.6).
- 7.7–7.8: Emphasis on analytical use of IIP for sustainability and vulnerability analysis, including:
  - currency composition analyses and remaining maturity analyses are encouraged (7.7).
  - Annex 14 and Appendix 9 introduce memorandum and supplementary tables presenting:
    - currency composition of assets and liabilities by sector with breakdown by principal foreign currencies including the U.S. dollar, euro, yen, and others,
    - breakdown by original maturity,
    - remaining maturity of long-term debt liabilities with sector breakdown (7.7–7.8).
- 7.8 (second occurrence): The integrated IIP presentation is increasingly important for analytical and policy purposes; granular integrated IIP data (transactions, revaluations, other changes in volume) are particularly useful for analyzing net IIP dynamics. Separate reporting of:
  - (a) debt cancellation and write-offs, and
  - (b) reclassifications under other changes in volume,
  is encouraged as supplementary items (7.8).

### Structure of the integrated IIP (Table 7.1 and Table 7.2 summary)
- Components shown in Table 7.1 (integrated IIP statement) include:
  - Opening IIP; accumulation accounts (transactions from BOP financial account; other changes in financial assets and liabilities broken into revaluations and other changes in volume, with exchange rate changes and other price changes and subitems such as debt cancellation and write-offs and reclassifications); closing IIP.
  - Assets by functional category: direct investment; portfolio investment; financial derivatives (other than reserves) and ESOs; other investment; reserve assets.
  - Assets by instrument: equity and investment fund share/units; debt instruments; monetary gold; financial derivatives and ESOs; special drawing rights; currency and deposits; debt securities; loans; insurance, pension, standardized guarantee schemes; other accounts receivable/payable; other financial assets and liabilities; total assets.
  - Liabilities paralleling the asset breakdown and total liabilities; net IIP.
  - Note: Table is expository; standard components are in Appendix Annex 914; ESO = employee stock option; IIP = international investment position (Table 7.1 note).
- Table 7.2 presents the integrated IIP with resident institutional sector breakdown:
  - Beginning- and end-of-period assets and liabilities by sector (Total economy; Households and NPISHs; General Government; Financial corporations; Nonfinancial corporations), by functional category and instrument; accumulation accounts broken down similarly; memorandum items include fair value of loan assets (or nominal value of nonperforming loan assets), short-term reserve-related liabilities, and currency composition (Table 7.2 note).

### Classification dimensions and consistency (7.12–7.13)
- 7.12: Classification dimensions for the integrated IIP:
  - (a) Functional category: direct investment; portfolio investment; financial derivatives (other than reserves) and employee stock options (ESOs); other investment; reserve assets.
  - (b) Financial instrument: equity and investment fund shares/units; debt instruments; other financial assets and liabilities (full breakdown per Chapter 5).
  - (c) Institutional sector of resident party: central bank; deposit-taking corporations except the central bank; general government; other financial corporations; nonfinancial corporations; other sectors (split between other financial corporations and remaining nonfinancial subsectors including households and NPISHs).
  - (d) Maturity (for debt instruments): short-term or long-term, by original and remaining maturity (paragraphs 5.103–5.105).
  - (e) Currency: domestic or foreign currency (paragraphs 3.95–3.97 for debt; 3.100 for equity); for financial derivatives, currency to receive or pay foreign currency (paragraph 5.108).
  - (f) Interest rate structure (for debt instruments): variable- or fixed-rate (paragraphs 5.109–5.114).
- 7.13: A consistent classification and level of detail should be used across IIP, financial account transactions, and other changes in financial assets and liabilities to facilitate comprehensive analysis and estimation of rates of return; instrument and sector detail aids linkage with monetary and financial statistics.

### Direct investment and valuation of unlisted and other equity (7.14–7.16-1)
- 7.14: Direct investment treatment follows paragraphs 6.8–6.24 and related discussion; standard components presented by instrument (equity and debt) and resident institutional sectors; directional principle presentation may be used supplementarily (paragraphs 6.42–6.45).
- 7.15–7.16: Valuation issue:
  - Listed equity: valued at current market prices when regularly traded.
  - Unlisted or illiquid equity (direct investment enterprises, private equity, unlisted/delisted, joint ventures, unincorporated enterprises): require estimation of market-equivalent prices (7.15).
- 7.16: The Manual prescribes three preferred methods for estimating market value of unlisted equity (note: methods are not ranked and must be assessed by circumstances):
  - (a) Own funds at book value (OFBV): sum of paid-up capital (excluding shares the enterprise holds in itself, including share premium), all types of reserves identified as equity (including investment grants when considered reserves), cumulated reinvested earnings, and holding gains/losses included in own funds; frequent revaluation (at least annual) improves approximation to market values; data not revalued for several years will likely be a poor reflection of market values (7.16(a)).
  - (b) Recent transaction price: prices from trades within the past year may be used if no material change since transaction date; usefulness declines as time passes and conditions change (7.16(b)).
  - (c) Market capitalization or Price to book Value (P/B): adjust book values at aggregate level using ratios based on listed companies with similar operations or revalue cost-carried assets using suitable asset price indices (7.16(cb) / 7.16(d) references to market capitalization method).
- 7.16-1: Additional valuation approaches and guidance:
  - Compilers should maintain transparency and state clearly methods used; BPM7 Compilation Guide will provide practical implementation guidance and a decision tree for valuation of unlisted equity (7.16-1).
  - (a) Net asset value: appraisals by management, directors, or independent auditors to obtain total assets at current value less total liabilities at market value; valuations should be recent (within the past year) and preferably include intangible assets.
  - (c) Present value and price-to-earnings ratios: estimate present value by discounting forecast future profits or apply market/industry price-to-earnings ratios to smoothed recent earnings; appropriate when balance sheet information is scarce but earnings are available (note on earnings measures: exclude one-off factors) (7.16-1).
  - (d) Market capitalization method: collect OFBV and adjust with ratios based on market capitalization to book value for listed peers or revalue cost-carried assets by asset price indices (7.16-1).
- References cited for direct investment and valuation guidance include OECD Benchmark Definition of Foreign Direct Investment (fourth/fifth edition) and IMF Coordinated Direct Investment Survey Guide 2015 (7.15 references).

*Source: BPM7 Chapter 7, "Balance Sheet: International Investment Position" (IMF Manual excerpt).*

### Chapter 7 Balance Sheet: International Investment Position

### Chapter 7 Balance Sheet: International Investment Position

### Valuation of Equity in Direct Investment
- Own funds at book value method uses the value of the enterprise recorded in the books of the direct investment enterprise as the sum of:
  - (a) paid-up capital (excluding any shares on issue that the enterprise holds in itself and including share premium accounts);
  - (b) all types of reserves identified as equity in the enterprise’s balance sheet (including investment grants when accounting guidelines consider them company reserves);
  - (c) cumulated reinvested earnings; and
  - (d) holding gains or losses included in own funds in the accounts, whether as revaluation reserves or profits or losses.
- The more frequent the revaluation of assets and liabilities, the closer the approximation to market values; data not revalued for several years may be a poor reflection of market values.
- Apportioning global value:
  - The current market value of the global enterprise group can be based on the market price of its shares on the exchange on which its equity is traded, if it is a listed company.
  - Where an appropriate indicator may be identified (e.g., sales, net income, assets, or employment), the global value may be apportioned to each economy in which it has direct investment enterprises on the basis of that indicator, by making the assumption that the ratio of net market value to sales, net income, assets, or employment is a constant throughout the transnational enterprise group.
  - "(Each indicator could yield significantly different results from the others.)"

### Methods When Current Market Prices Are Not Directly Observable
- Less suitable data may need to be used as inputs when none of the primary methods are feasible (paragraph 7.17).
  - Examples include cumulated flows or a previous balance sheet adjusted by subsequent flows.
  - Because these sources use the prices of previous periods, they should at least be adjusted for subsequent price developments, for example, by using aggregate share price or asset price indexes and by taking into account exchange rate movements, where relevant.
  - "The use of unadjusted summing of past transactions should not be used is not recommended."
- Choice of method should consider availability of information and judgments as to which available method best approximates market values (paragraph 7.18).
  - Different methods may be suitable for different circumstances; "a standard ranking of the alternative methods is not proposed."
  - Compilers should be transparent and should state clearly the method(s) used.
  - Methods discussed in the OECD Benchmark Definition of Foreign Direct Investment may be useful for valuation of other unlisted equity securities and other equity.

### Negative Equity Positions (Box 7.1)
- The Manual recommends recording negative equity positions for unlimited liability entities if valuation methods for unlisted equity result in such values.
- For limited liability entities:
  - It is recommended to record negative equity positions as the default option and only zero out negative positions in specific cases where the shareholders’ and their affiliates’ liability is strictly limited.
- Definition and implications of strictly limited liability:
  - Refers to a situation where the shareholder would not suffer any other direct economic losses than the existing equity investment in case of bankruptcy and would not be likely to take on any financial obligations due to the absence of implicit guarantees or significant reputational risks.
  - Examples of other direct economic losses include loan losses and the realization of guarantees; willingness to assume new financial obligations could be related to reputational, societal, or other reasons.
  - "It can generally be assumed that implicit guarantees or significant reputational risks exist when a shareholder’s ownership share is at least 10%."
  - This implies that negative direct investment equity positions should not be zeroed out unless a direct investor has no legally binding economic obligations, except for the existing equity investment, and a history of not assuming any new financial obligations in the event of bankruptcy or termination of its direct investment enterprises.
- Negative equity positions in public corporations and central banks should never be zeroed out.
- Compilers are encouraged to show negative equity positions as supplementary “of which” items under equity assets and liabilities.
- Ensure stock-flow consistency through recording of revaluations rather than other changes in the volume of financial assets and liabilities if negative equity is zeroed out.
- Footnote guidance:
  - "In case some shareholders are zeroed out while others are not, the latter would only record negative equity proportional to their ownership share."

### Intercompany Borrowing, Pass-Throughs, and Claims
- An entity resident in one economy may borrow funds on behalf of affiliated enterprises in one or more other economies (paragraph 7.20).
  - Affiliates may include holding companies, parent companies, direct investment enterprises, and fellow enterprises.
  - Liability is often guaranteed by the parent or a fellow enterprise, explicitly or implicitly, in whole or in part; alternatively, affiliated enterprise may commit future revenue streams.
  - Creditors record a claim on the entity that directly undertakes the borrowing, not on the enterprise that ultimately receives the funds or makes the guarantee.
- When funds raised are passed on by the borrowing entity to an affiliated enterprise, the initial borrowing entity has a claim on the affiliated enterprise, assumed to give rise to a loan unless evidence indicates a debt security or equity (paragraph 7.21).
  - This can arise for pass-through funds, conduits, SPEs and similar legal structures.
  - Such investment is often reverse investment or investment between fellow enterprises.

### Quasi-corporations and Owners’ Claims
- Identification of institutional units for branches, notional resident units for ownership of land and natural resources, some joint ventures, preparatory operations prior to incorporation and other quasi-corporations is discussed in paragraphs 4.26–4.49 (paragraph 7.23).
  - Owners are shown as having a claim on the institutional unit, rather than as directly owning the various individual assets.
- Owners’ claims on quasi-corporations that are resident in other economies are usually classified as direct investment (paragraph 7.24).
  - In rare cases where the proportion of equity in land or a joint venture is less than 10 percent, the claim is classified as other investment—other equity and equity in international organizations.
- Valuation of equity in quasi-corporations (paragraph 7.25):
  - Equity should be valued as equal to the market value of the quasi-corporations’ assets less the market value of liabilities other than equity to both residents and non-residents.
    - "(This method would mean that quasi-corporations have no residual net worth.)"
  - Alternatively, equity in quasi-corporations may be valued using the same methods as used for direct investment equity (paragraphs 7.16–7.17).

### Intercompany Lending in Debt Securities
- Intercompany lending valuation:
  - Basic valuation method for debt securities component of intercompany lending is market value.
  - It could be compiled at nominal value as a supplementary item in cases where the economy is significantly impacted by direct investment.
  - Refer to "Additional Analytical Position Data" part of Annex 14 for further details.

### Portfolio Investment: Equity and Debt Specifics
- Equity with dividends declared payable but not yet paid (paragraph 7.26):
  - In market quotations, dividends declared payable but not yet paid are taken into account in the share price.
  - After ownership is determined for dividend payment, shares go “ex dividend”; "the dividend value becomes separated from the share price value and the share price falls to reflect the value of the dividend payout."
  - After that time, dividends declared should be included in accounts receivable/payable until payment is made.
- Debt instruments with accrued interest (paragraph 7.27):
  - Accrued interest not yet paid on debt securities should be included in the outstanding amount of the financial asset or liability.
  - Accrued interest not yet paid includes interest that has accrued and that is not yet due for payment or that is due for payment but in arrears.
  - Accrued interest not yet paid should not be reported separately.
  - Market price terminology:
    - "Dirty price" = market price including interest that has accrued but is not yet payable; suitable for valuation of items in the IIP (provided interest due and not yet paid is also included).
    - "Clean price" = market price excluding the accrued interest not yet payable; requires accrued interest not yet paid to be added for use in the IIP.
  - Methods of calculating the accrual of interest discussed in paragraphs 11.48–11.76.
- Short positions (paragraphs 7.28 and 7.28-1):
  - Short positions occur when an institutional unit sells securities for which it is not the economic owner; delivery to the purchaser is made using a borrowed security.
  - The party with the short position records a negative value for the holding of the asset; the short position is shown as a negative asset, rather than a liability.
  - This treatment reflects economic ownership: the holder of the negative position is exposed to the risks and rewards of the security, in an equal and opposite way, as the party in a long position.
  - Recording a negative position overcomes double counting by economic (original) owner and final owner and helps present consistent debtor-creditor relationships at a global level.
  - Reverse transactions may be sequenced in a long chain using the same security.
  - Annex 7 (Table 4) explains recording of on-selling securities acquired under repo or security lending in the financial account and IIP.
- Unlisted debt and equity securities (paragraph 7.29):
  - Positions in unlisted portfolio investment equity securities without an observable market price may be valued using methods discussed for direct investment equity (paragraphs 7.16–7.17).
  - Some listed debt securities may have no quoted prices; a market price can be estimated by discounting future cash flows using a discount rate that takes into account the risk of default (present value approach).

### Debt Securities Valuation and Nominal Values
- Basic valuation method for debt securities is market value, but compilation at nominal value is encouraged as a supplementary item (paragraph 7.30).
  - External Debt Statistics: Guide for Compilers and Users recommends that both valuations be used.
  - The nominal value of debt securities reflects the present value of amounts owed to the creditors (i.e., sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments).
  - The Manual emphasizes compiling a table reconciling nominal and market valuation of debt securities liabilities as part of the “Additional Analytical Position Data” in Annex 14.
  - Where data on debt security holdings at nominal value are relevant, the nominal value of the total amount of assets in debt securities may be included in the supplementary table, next to liabilities.
  - For the definition of nominal value and related explanation, refer to the Annex: Methods to Value Transactions and Stocks, Chapter 3.

### Zero-Coupon and Deep-Discount Bonds
- Zero-coupon bonds (paragraph 7.31):
  - Have a single payment at maturity and no coupon payments.
  - Sold at a discount from face (or par) value; at maturity, an amount equal to face value is repaid.
  - The difference between the discounted issue price and the face value reflects the market rate of interest at the time of issue—the longer the maturity and the higher the market interest rate, the greater the discount against the face value.
  - Accrual of interest on zero-coupon bonds is discussed in paragraph 11.55 and illustrated in Box 11.2.
- Deep-discount bonds (paragraph 7.32):
  - Have small or no coupon payments and are issued at a low coupon compared with the market rate of interest, so issued at a considerable discount to face value.
  - The difference between the issue price and face value accrues as interest over the life of the bond; market value increases as the interest accrues.
  - Accrual of interest on deep-discount bonds is discussed in paragraph 11.56.

### Financial Derivatives (Other Than Reserves) and Employee Stock Options (ESOs)
- Valuation (paragraph 7.33):
  - Financial derivatives and ESOs are valued at market prices prevailing on balance sheet recording dates.
  - If market price data are unavailable, other fair value methods (such as option models or present values) may be used.
  - Compilers are generally constrained to use the parties’ own accounts.
  - When payments are made before the derivative contract expires (such as payments in interest swaps), the change in the value of the contract is recorded as transactions.
- Options and warrants (paragraphs 7.34 and 7.35):
  - For an option (including warrants), the market value recorded is the current value of the option; in absence of a prevailing market price, the estimated cost of buying out the rights of the option holder should be used.
  - The counterpart liability is attributable, by convention, to the writer of the option and is valued at the current cost of buying out the rights of the option holder.
  - For a warrant, the counterpart liability of the issuer is the current outlay required to buy out the exercise rights of the holder.
  - Forward-type contracts are recorded at market value; when payments are effected, a transaction is recorded and the change in the value of the asset and associated liability is reflected in the position.
  - The present value (or market price) of a financial derivative is derived from the difference between the agreed-on contract price of an underlying item and the prevailing market price (or expected market price), appropriately discounted.
  - For credit default swaps, value is determined by the difference between the present value of the series of premium payments and the estimated present value of the potential payments in the event of default.
  - The value of a swap contract is derived from the difference, appropriately discounted, between expected gross receipts and gross payments.

*International Monetary Fund — Chapter 7, Balance Sheet: International Investment Position*

### Chapter 7 Balance Sheet: International Investment Position

### Chapter 7 Balance Sheet: International Investment Position

### Financial derivatives: valuation, positions, and revaluations
- Financial derivative contracts (except standard option contracts) of the forward-type can switch from an asset position to a liability position (and vice versa) between reporting dates because of movement in the price of the underlying item(s) (paragraph 7.36).
- When a switch in position occurs and there are no settlement payments:
  - the market value of the gross asset or liability position at the close of the previous accounting period is revalued to zero;
  - the gross liability or asset position is revalued from zero to the market value at the end of the present accounting period (paragraph 7.36).
- Gross asset and gross liability data for derivatives should be compiled by summing values of individual contracts in asset positions and in liability positions, respectively (paragraph 7.37).
- Financial derivatives should be reported separately for both assets and liabilities (paragraph 7.37).
- Notional values are presented (see Appendix 149, Tables I–III) and are defined as the amount underlying a financial derivative contract necessary for calculating payments or receipts; this amount may or may not be exchanged (paragraph 7.37).
- Any value changes in financial derivatives are classified as revaluations and are included in the other changes in financial assets and liabilities account (paragraph 7.37-1).
- For derivatives that include foreign exchange risk, separation of exchange rate and other revaluations may not be applicable; the convention is that all revaluation effects are due to price revaluations (paragraph 7.37-1).
- Cumulation of transactions should never be used to estimate financial derivative positions because transactions relate largely to option-type contracts and to settlements, while positions emerge largely from revaluations (paragraph 7.38).

### Employee stock options (ESOs)
- ESOs are valued consistently with the cumulated compensation of employees until the vesting date (see paragraphs 11.20–11.21); thereafter they are valued at market prices (paragraph 7.39).
- ESOs can be measured from a market value of equivalent options or according to an options-pricing model, such as Black-Scholes; international accounting standards give guidance and recording in the international accounts normally follows business accounts (paragraph 7.39).

### Other investment — valuation of nonnegotiable instruments (nominal value principle)
- Nonnegotiable instruments include loans, deposits, and other accounts receivable/payable; the primary valuation for positions in these instruments is nominal value as defined in paragraph 3.88 (paragraph 7.40).
- In the case of other equity and equity in international organizations included in other investment, valuation methods applicable to unlisted direct and portfolio investment equity may be used (paragraph 7.40).
- Accrued interest not yet paid should be included in the outstanding amount of the financial asset or liability rather than classified separately; accrued interest includes FISIM accrued and not yet paid (paragraph 7.41).
- Nominal values are not adjusted for expected losses or for changes in interest rates; market value may differ primarily because of changes in market interest rates and the possibility that some liabilities may not be repaid (paragraph 7.42).
- Rationale for nominal valuation:
  - pragmatic concerns about data availability;
  - consistency in reporting by debtors and creditors;
  - nominal valuation shows actual legal liability and the starting point of creditor recovery behavior (paragraph 7.43).
- Loans with concessional interest rates are valued at nominal value based on the contractual interest rate, similar to any other loans (paragraph 7.43-1).
- The nominal value can be reduced by a write-off, restructuring, or debt forgiveness:
  - liabilities canceled or written off by the creditor as uncollectible (bankruptcy, liquidation, court order) (paragraph 7.44);
  - in formal debt reorganization, the old liability is extinguished and a new liability is created (paragraph 7.44).
- Evidence of loan deterioration due to publicly known events can warrant value reset beyond bankruptcy/liquidation or court decisions; guidance on when to reset values will be provided in the BPM7 Compilation Guide (paragraph 7.44-1).

### Additional data on loans and other nonnegotiable instruments (memorandum and supplementary items)
- Because nominal value can be incomplete when instruments are impaired, the following additional items may be included for loans (paragraph 7.45):
  - (a) fair value,
  - (b) nonperforming loans,
  - (c) loan loss (bad debt) provisions.
- Fair value of loans is shown as a memorandum item for creditors; if fair value is not available, nominal value of nonperforming loans should be provided as a memorandum item (paragraph 7.46).
- If fair value data are available, nonperforming loans is a supplementary item; loan loss provisions and arrears may also be provided on a supplementary basis (paragraph 7.46).
- Similar impairment issues arise for deposits and trade credit; these instruments should be recorded at nominal value, but where significant differences exist, indicators similar to those for loans should be shown as supplementary items (paragraphs 7.47 and 7.55).
- Metadata on definitions and sources used for impairment indicators are important given the range of options; more prescriptive guidance may be provided as accounting procedures standardize (paragraph 7.56).

### Fair value of loans
- Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction (paragraph 7.48).
- Fair value represents a market-equivalent value and is the preferred indicator of the effect of loan impairment; it is shown as a memorandum item for assets where available (paragraph 7.48).
- Calculation of fair value takes into account expected loan losses and, for fixed-rate loans, changes in market interest rates; practical availability of fair value estimates is limited by business accounting practice (paragraph 7.49).

### Nonperforming loans (definition, recording, and treatment)
- Nonperforming loans are defined as loans for which (paragraph 7.50):
  - (a) payments of interest and/or principal are past due by 90 days or more, or
  - (b) interest payments equal to 90 days or more have been capitalized or delayed by agreement (reinvested into the principal amount), or
  - (c) evidence exists to reclassify a loan as nonperforming even in the absence of a 90-day past due payment, such as when the debtor files for bankruptcy.
- Nonperforming loans are recorded at nominal value, including accrued interest not yet paid; they remain nonperforming until written off, forgiven, reorganized, or they become performing loans (paragraph 7.51).
- The three-month (or 90-day) criterion is most widely used, though other regulatory definitions are acceptable; the nominal value of nonperforming loan assets is a memorandum item when loan assets at fair value are not available (paragraph 7.52).
- Replacement loans arising from rescheduling or refinancing, or loans provided to make payments on the original loan, may be reported; replacement loans that are complied with by the debtor and meet supervisory guidance are not classified as nonperforming (paragraph 7.53).

### Loan loss (bad debt) provisions
- Loan loss provisions are internal accounting entries by creditors to account for possible loan losses and may be used as an indicator of the difference between nominal values and fair values (paragraph 7.54).
- Provisions are not treated as liabilities in the ESS because they are not legal contractual obligations associated with a liability; international accounting standards allow various approaches so procedures may differ between enterprises and economies (paragraph 7.54).
- Loan loss provisions may differ from losses on nonperforming loans due to collateral or expectations about future defaults (paragraph 7.54).

### Financial leases
- A financial lease is treated to capture economic reality by moving away from legal form: goods under a financial lease are treated as if purchased and owned by the user, and the financial lease is shown as a loan from the lessor to the lessee used to finance acquisition of a fixed asset by the lessee; financial leases affect goods, services, income, financial transactions, and positions (paragraph 7.57).

### Recording positions for reverse transactions (repos, securities lending, gold swaps)
- Reverse transactions involve a change of legal ownership of securities, gold, or other assets with a commitment to repurchase the same or similar assets; the commitment means the original owner retains risks and rewards, so there is no change of economic ownership and no transaction in the asset is recorded—ownership shown in the IIP is unchanged (paragraph 7.58).
- If cash is supplied in a reverse transaction (e.g., repo, securities lending with cash collateral), the arrangement is regarded as giving rise to a loan or deposit; a gold swap for cash is treated analogously as a loan with gold as collateral (paragraph 7.59).
- Custodian data may pose problems attributing securities ownership because custodians may not know whether securities are under a repurchase agreement (paragraph 7.60).
- If a party that receives securities under a reverse transaction on-sells them to a third party, it has a short position (paragraph 7.61).
- Repurchase agreements, securities lending with cash collateral, and margin lending can be used to obtain short-term financing; separate information on these loans may be provided as an “of which” supplementary item under loans to analyze liquidity transformation and leverage creation (paragraph 7.61-1).

### Overnight deposits (sweep accounts)
- Overnight deposits involve funds moved back and forth overnight, sometimes across economies; funds are returned at the beginning of the next working day and may then be moved back at the close of business (paragraph 7.62).
- Positions should be measured after funds are moved at the end of the day to ensure consistency between measures of interest flows and positions; measurement timing can substantially affect statistical aggregates, including external asset and liability positions and financial transactions (paragraph 7.62).
- Major data users are interested in the size and location of these stocks and flows for risk assessment and other purposes (paragraph 7.62).

### Insurance technical reserves, pension and annuity entitlements, and provisions for calls under standardized guarantees
- These reserves include (paragraph 7.63):
  - (a) nonlife insurance technical reserves: prepayment of insurance premiums less service charges and reserves for outstanding claims (both reported claims and claims incurred and not reported); equalization reserves for events that have occurred are included, whereas reserves for events that have not occurred are excluded;
  - (b) entitlements of beneficiaries under life insurance policies and pension schemes;
  - (c) provisions for calls under standardized guarantees.
- Nonlife insurance technical reserves consist of prepayment of insurance premiums less service charges and reserves for outstanding claims (both reported and incurred but not reported); equalization reserves for events that have occurred are included, whereas reserves for events that have not occurred are excluded (paragraph 7.63-1).
- Insurance technical reserves, pension and annuity entitlements, and provisions for calls under standardized guarantees are liabilities of insurance companies and pension funds and assets of policyholders and beneficiaries (paragraph 7.64).
- For economies that are major insurance service exporters or importers, cross-border insurance reserves may be significant; for economies that are major sources or destinations of temporary cross-border workers or retirees who change residence, life insurance and pension entitlements may be important elements of the IIP (paragraph 7.64).
- Insurance technical reserves may be classified as direct investment in cases discussed in paragraph 6.27 (paragraph 7.64).
- A discussion on Islamic insurance (Takaful) and re-insurance (Re-takaful), including their reserves and similarities/differences with conventional insurance, is provided in chapter 17 Islamic Finance (paragraph 7.64-1).

*Source: Chapter 7, Balance Sheet: International Investment Position (BPM7).*

### Chapter 7 Balance Sheet: International Investment Position

### Chapter 7 Balance Sheet: International Investment Position

### Pension entitlements: definitions and measurement
- Defined contribution scheme:
  - Benefits payable on retirement are defined exclusively in terms of the level of the funds built up from contributions and investment returns.
  - The entire risk of providing an adequate income in retirement is borne by the beneficiaryemployee.
  - The liability of a defined contribution schemefund, and the corresponding assets of the beneficiaries, are equal to the current market value of the assets of the fund, including any claims on the scheme’ sponsor any claims on the employer.
  - Defined contribution plans are always funded.
- Defined benefit scheme:
  - Benefits payable on retirement are determined by the use of an actuarial formula, either alone or as a minimum amount related to participants’ length of service and salaries.
  - The liability of a defined benefit scheme (including nonautonomous pension funds and unfunded pension schemes), and the corresponding assets of the beneficiaries, are equal tocalculated by estimating the present value of the promisedfuture benefits using actuarial estimates of the expected life length of the beneficiar-ies.
  - In defined benefit schemes, benefits to the policyholder are guaranteed, but the scheme may be (partially) funded or unfunded.
- Measurement approaches:
  - The calculation of the value of pension entitlements may be direct or actuarial.
  - Obligations of unfunded pension schemes are recognized as liabilities based on actuarial estimates of the accrued liability to beneficiaries under the scheme.
  - Potential payments by social security schemes are not recognized as financial assets or liabilities.

### Insurance-related provisions and cross-border allocation
- Provisions for calls under standardized guarantees:
  - Calculated similarly to nonlife insurance technical reserves.
  - Equal to the present value of expected calls under outstanding guarantees, net of any recoveries expected from defaulting parties.
- Allocation between residents and nonresidents:
  - Where reserves, entitlements, and provisions are measured from accounts of insurance companies, pension schemes, and issuers of standardized guarantees, they may need to be split between liabilities to residents and nonresidents according to a suitable indicator such as premiums payable.
  - Priority attached to estimating cross-border proportions depends on their significance in each economy.

### Reserves: valuation and components
- Valuation at reference dates:
  - Reserve assets are valued primarily at current market prices.
  - Monetary gold is valued at the prevailing market price.
  - SDRs are valued at market rates calculated by the IMF.
  - Deposits and loans are valued at nominal values.
- Special Drawing Rights (SDRs) and net IIP effects:
  - SDR holdings are a reserve asset.
  - The allocation of SDRs to IMF members is shown as the incurrence of a liability by the recipient and included in other investment.
  - For an economy that holds only its original allocation, reserve assets increase by the value of SDR holdings, but net IIP is unchanged.
- Reserve-related liabilities:
  - Shown as a memorandum item to the IIP on a short-term (remaining maturity) basis.
  - Defined in paragraphs 6.115–6.116.
- Presentation of foreign currency positions:
  - A comprehensive picture of foreign currency assets and liabilities of monetary authorities and central government, including positions with residents as well as nonresidents, can be presented according to the format in Table V in Anneppendix 914.
- Sovereign wealth / special purpose government funds:
  - Some governments have large special purpose government funds—usually known as sovereign wealth funds.
  - Some assets of such funds may be included in reserve assets or other functional categories.
  - Where significant, foreign assets of the special purpose government fund not included in reserve assets can be shown separately as supplementary items.

### Off-balance-sheet items and contingent liabilities
- Certain actual and potential obligations are not recognized as liabilities in the IIP (examples: potential liabilities under one-off guarantees, unfulfilled loan commitments, other explicit contingent liabilities).
- If obligations to nonresidents are significant, compilers should provide supplementary data in terms of the maximum exposure loss by type of contingent liability.

### Positions and transactions with the IMF: quotas and components
- Quota subscription components:
  - Foreign exchange component:
    - A member is required to pay 25 percent of its quota in SDRs or in foreign currencies acceptable to the IMF.
    - This 25 percent portion is a component of the member’s reserve assets.
    - In the balance of payments, subscribing this portion is shown as a transaction involving a reduction in other reserve assets (credit) offset by an increase in the reserve tranche position in the IMF (debit).
  - Domestic currency component:
    - The other 75 percent of the quota is payable in the member’s own currency at a designated depository, normally the member’s central bank.
    - Payment is made either in domestic currency (IMF No. 1 and No. 2 Accounts) or by issuance of a promissory note (IMF Securities Account).
    - The No. 1 Account is used for the IMF’s operational transactions (e.g., purchases and repurchases), whereas the No. 2 Account is used for the payment of local administrative expenses incurred by the IMF in the member’s currency.
    - Promissory notes are encashable by the IMF on demand.
    - The domestic portion of the quota payment is not recorded in the member’s balance of payments or in the IIP, except for the No. 2 account.
    - No interest is payable on either the deposit account or the note.
- Periodic quota reviews:
  - Recording transactions that reflect a change in a member’s quota is the same as the recording that takes place when the quota is initially paid.

### Reserve position in the IMF and operational use
- Definition and components:
  - Reserve position in the IMF equals the sum of the reserve tranche plus any indebtedness of the IMF (under a loan agreement) in the General Resources Account that is readily available to the member country.
  - The reserve tranche represents the member’s unconditional drawing right on the IMF, created by the foreign exchange portion of the quota subscription, plus increases (decreases) through the IMF’s sale (repurchase) of the members’ currency.
  - A member’s reserve position in the IMF constitutes part of its reserve assets in the IIP.
- Using the reserve tranche:
  - To use its reserve tranche, a member may purchase foreign exchange from the IMF with its own currency, provided it has a balance of payments need.
  - The domestic currency, equal to the value of the foreign exchange, is paid into the IMF’s No. 1 Account with the member’s central bank or through issuance to the IMF of a promissory note recorded in the IMF’s Securities Account.
  - The transaction is recorded in the balance of payments as a reduction in the member’s reserve tranche in the IMF, offset by an increase in the member’s other reserve assets.

### Credit and loans from the IMF; classification
- Economic outcome:
  - Use of IMF credit or Poverty Reduction and Growth Facility (PRGF) loans results in the member acquiring foreign exchange in return for agreeing to meet a set of conditions.
- Classification and execution:
  - Both IMF credit and loans are classified as loans under other investment.
  - PRGF loan:
    - Results in the member borrowing foreign exchange with a commitment to repay.
    - Such loans do not affect the IMF No. 1 Account.
  - IMF credit:
    - The member “purchases” foreign exchange from the IMF in return for its domestic currency.
    - Use of IMF credit is shown as the member’s liability (in SDRs) in the balance of payments and IIP, whereas the sale of domestic currency to the IMF in the No. 1 Account is not shown as a balance of payments transaction or in the IIP.
    - Liabilities under IMF credit arrangements are extinguished when the member uses foreign exchange to “repurchase” its domestic currency.

### Maintenance of value and other IMF operational features
- Maintenance of value payments:
  - For use of IMF credit, if the value of the member’s domestic currency changes in relation to the SDR, “maintenance of value payments” are made once a year in the No. 1 Account in domestic currency to maintain a constant SDR liability.
  - Because the liability is denominated in SDRs, the maintenance of value payments are not entered as transactions in the balance of payments.
- Members’ credit to the IMF:
  - A member may extend credit or make loans to the IMF that are not part of the Reserve position in the IMF, for example where a member’s claim on the IMF is not immediately encashable at a time of balance of payments need.

### Remuneration, No. 2 Account, and SDR institutional treatment
- Remuneration:
  - The IMF pays its members “remuneration” quarterly on the basis of their reserve tranche position, except for a small portion related to prior quota payments in gold that are interest-free resources to the IMF.
  - This remuneration is classified on an accrual basis as investment income–reserve assets–interest (credit), offset by an increase in reserve assets (debit).
- IMF No. 2 Account:
  - Used by the IMF for administrative payments.
  - Unlike the No. 1 Account, the No. 2 Account is reflected in the balance of payments of a member as a liability.
  - Transactions involving the No. 2 Account are recorded as increases or decreases in this liability and are offset by the source or use of funds.
  - Example: when the IMF transfers funds from the No. 1 Account to the No. 2 Account in a member economy, the member’s balance of payments shows an increase in its reserve tranche (debit) and an offset under other investment liabilities relating to currency and deposits (credit). When the IMF uses funds from the No. 2 Account to pay for acquisition of goods and services, the member’s balance of payments shows a reduction in this account (debit) and an offset (credit) under government goods and services n.i.e.
- Special Drawing Rights (SDR) institutional details:
  - The SDR is an international reserve asset created by the IMF in 1969.
  - It is administered by the SDR Department of the IMF, whose accounts are kept strictly separate from the General Resources Account.
  - The SDR is not a claim on the IMF; membership of the SDR Department incurs the asset or liability position.
  - SDRs are instruments as defined in paragraphs 5.34–5.35.
  - SDR allocations received by a country are reported as liabilities under other investment (paragraph 6.61) and reserve-related liabilities (paragraph 6.116).
  - SDR holdings are classified as reserve assets (paragraph 6.84).

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-ch7.pdf_