## Issue Note: Treatment of Negative Equity Positions

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### Valuation methods and potential for negative valuations
- Six recommended fair valuation methods for unlisted equity positions are the same in BPM6 (paragraph 7.16) and the 2008 SNA (paragraph 13.71).
- Guidance Note D.2 on Valuation of Unlisted Equity reduces recommended methods to three: Own funds at book value (OFBV), recent transaction prices, and market capitalization (for instance, P/B-ratios).
- OFBV and market capitalization valuation methods can generate negative valuations.
- Recent transaction prices will usually not be negative where the investor is not liable for losses exceeding capital invested.
- Note is mostly relevant for unlisted equity because listed companies are regularly traded and investors are subject to strictly limited liability.

### Current standards, identified gap, and previous guidance
- Current macroeconomic statistical standards do not provide clear guidance on treatment of negative equity positions.
- The Discussion Note (DN) on Equity: The Case of Negative Valuations noted negative asset positions can arise for reasons other than negative valuations and are recorded in specific cases (e.g., short positions; transferable contracts and leases).
- 2019 IMF Committee on Balance of Payments Statistics agreed negative equity positions should be allowed to be recorded unless attributable to erroneous reporting by respondents.
- GFSM 2014 (paragraph 7.173) anticipates negative valuation of other equity for unincorporated enterprises but states for incorporated corporations with limited shareholder liability, the minimum value of their equity is zero.
- European System of Central Banks Working Group on Financial Accounts concluded in 2019 that negative values for equity positions should not be recorded when liability is limited, irrespective of valuation method.

### Discussion Note (DN) recommendations
- DN recommended:
  - Allow recording negative equity valuations for unlimited liability entities.
  - Generally zero out negative equity for limited liability entities, except for certain legal and economic cases.
  - Legal exceptions could include investor liability due to legal obligations, bilateral arrangements with authorities, or tax authority decisions.
  - Presented two options for loan guarantees:
    - Treat loan guarantees as legal obligations (allow negative equity up to guarantee amount).
    - Do not treat loan guarantees as legal obligations (do not allow recording negative equity for guarantees).
  - BPM7 and 2025 SNA editorial teams recommended treating loan guarantees like other legal obligations.
- DN recommended ensuring stock-flow consistency by recording other price changes rather than other volume changes when negative equity is zeroed out.

### Preliminary discussions and stakeholder views (AEG and Committee, Oct 2023; Feb 2024 outcomes)
- AEG and Committee unanimously agreed negative equity positions may be recorded for unlimited liability entities.
- Most members agreed stock-flow consistency should be ensured via other price changes if negative equity is zeroed out.
- AEG members mostly supported zeroing out negative equity for limited liability entities except for legal and economic exceptions; views mixed on loan guarantees.
- Committee members emphasized:
  - Need to expand cases where negative equity is allowed (reputational reasons, implicit guarantees).
  - Difficulty distinguishing legal form in practice, especially for outward FDI.
  - Need to address central bank treatment.
  - Support for treating loan guarantees like other legal obligations and allowing negative equity up to guarantee amount when affiliates provided guarantees.
- Joint February 2024 AEG/Committee meeting and subsequent written consultation: majority supported IN recommendations:
  - Negative equity positions should be allowed as the default option.
  - Negative equity should only be zeroed out in specific cases where liability is strictly limited.

### Options for treatment of negative equity valuations (limited liability entities)
- Option 1: Always zero out negative equity
  - Similar to GFSM 2014 and ESCB Working Group on Financial Accounts (2019).
- Option 2: Never zero out negative equity
  - Similar to Committee approach for FDI equity in 2019.
- Option 3: Zero out negative equity, except for certain legal and economic cases
  - Default: do not record negative equity.
  - Two versions regarding loan guarantees: one allows recording negative equity up to guarantee amount; the other does not.
- Option 4: Do not zero out negative equity, except for specific cases where the shareholder’s and its affiliates’ liability is strictly limited to the existing equity investment
  - Default: allow recording negative equity.
  - Zero out only when shareholder (and affiliates) would not suffer any other direct economic losses than the existing equity investment and would not be likely to assume any new financial obligations in bankruptcy or termination.
  - Examples of other direct economic losses include loan losses and realization of guarantees.
  - Willingness to assume new financial obligations could be related to reputational, societal, or other reasons.

### Recommendation and operational guidance (BPM7 and 2025 SNA editorial teams)
- Editorial teams recommend Option 4:
  - Allow recording of negative equity positions as the default; zero out only in specific cases where liability is strictly limited.
  - Definition 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 because there are no implicit guarantees or significant reputational risks.
  - Operational assumption: implicit guarantees or significant reputational risks are generally assumed to exist when a shareholder’s ownership share is at least 10 percent.
    - Implies negative direct investment equity positions should not be zeroed out unless a specific direct investor has no legally binding economic obligations, except existing equity investment, and a history of not assuming new financial obligations in the event of bankruptcy or termination of its direct investment enterprises.
  - Negative equity positions in public corporations should never be zeroed out to avoid hiding fiscal vulnerabilities.
  - Principle applies to central banks in all economies, irrespective of formal ownership, given likelihood of government intervention to avoid far-reaching economic disruptions.

### Presentation and compilation guidance
- Compilers are encouraged to show negative equity positions as supplementary “of which” items under equity assets and liabilities to inform users and facilitate analytical rearrangements (e.g., treating negative assets as liabilities).
- Recording negative equity positions for limited liability entities aligns with fundamental principles of macroeconomic statistics: shareholders may need to pay to avoid obligations related to ownership at a point in time.
- If it becomes known that a shareholder did not incur losses and the amount had not been zeroed out, a valuation adjustment to zero could be made when that is known to the compiler, analogous to updates when a recent transaction price becomes available.

### Initial consultation feedback and editorial responses
- Draft sent to OECD WGIIS and IMF GFSAC; overall strong support for draft recommendations.
- Three main issues and editorial responses:
  - Issue 1: Consider recording a positive liability instead of a negative equity asset.
    - Editorial response: IN encourages showing negative equity as supplementary “of which” items under equity assets and liabilities to allow rearrangement by users, accommodating compilers who prefer positive liability recording.
  - Issue 2: Provide clear guidance on cases where negative equity can be zeroed out.
    - Editorial response: Operational guidance added—implicit guarantees or significant reputational risks are generally assumed when shareholder ownership share is at least 10 percent.
  - Issue 3: Avoid reference to “SOEs.”
    - Editorial response: IN now refers to the statistical concept “public corporations” rather than “SOEs.”

### Annex II — OECD WGIIS findings, survey evidence and recommendation
- Background and surveys:
  - OECD WGIIS ran two online surveys from 17 November 2023 to 5 January 2024:
    - Conceptual/practical aspects: completed by 36 WGIIS countries, including eleven non-OECD members.
    - Current practices/empirical evidence: completed by 34 countries, 11 non-OECD members.
- Key DN issues highlighted:
  - DN premise: limited liability protects investors from losses exceeding invested capital; negative equity for limited liability companies not meaningful unless exceptions apply.
  - DN implied FDI compilers should differentiate limited versus unlimited liability companies for resident and foreign affiliates.
  - Two proposed exceptions to zeroing out negative equity:
    - Legal exception: investor liability due to legal obligations, bilateral arrangements with authorities, or tax authority decisions.
    - Economic exception: where non-equity liabilities of a limited liability entity exceed its assets and shareholder loans would bear losses in bankruptcy; negative equity could be recorded up to the amount of shareholder loans.
- Survey outcomes — practical and conceptual concerns:
  - Differentiation between limited and unlimited liability companies:
    - 12 out of 36 respondents cannot differentiate between limited and unlimited liability corporations on the liability side due to collection system limitations.
    - Only two respondents can differentiate the legal form of affiliates abroad on the asset side, and only with considerable delay, implying asymmetric treatment between assets and liabilities.
  - Parent support and bankruptcy evidence:
    - Only four out of 36 countries report that the parent does not step in to cover affiliate debts.
    - Little evidence that affiliates leave the FDI universe because of bankruptcy due to negative equity.
  - Application of the legal exception:
    - Only three out of 36 countries would be able to assess legal exceptions; court decisions and similar actions are time-lagged and resource intensive; loan guarantees identifiable only if disclosed in affiliate financial accounts.
  - Application of the economic exception:
    - 11 out of 36 respondents could implement the economic exception (less than a third).
    - Debt from parent or fellow enterprises backing negative equity is common across sectors and jurisdictions, notably in exploration and extraction affiliates.
    - Several countries strongly support the economic exception because negative equity often coexists with large intra-company loans and negative reinvested earnings (RIE).
    - Because more than two in every three countries cannot apply this exception, retaining negative equity is crucial to avoid exaggerating FDI positions and to preserve signals of likely financial engineering by parents.
  - Additional practical concerns:
    - a) Exceptions are not exceptional: largest negative equity cases often fall under both exceptions, so default should be to keep negative equity.
    - b) High implementation cost: consistent implementation would be prohibitively expensive, lengthy and resource intensive; reversing burden of proof to allow negative equity by default is recommended by some respondents.
    - c) Timeliness: information to apply legal exception available with considerable time lag, affecting revision policies.
    - d) Asymmetries: zeroing out negative equity on the outward/asset side extremely difficult due to diverse jurisdictional company forms and limited court information.
    - e) Legal framework: in some jurisdictions unlimited liability companies are rare or absent; domestic law may mandate a positive lower bound for equity, requiring shareholder capital injections when thresholds are breached.
    - f) Identifying valid thresholds: majority of negative equity stock may be many small cases, making exception application practical only for the largest positions; no clear objective cross-country threshold exists.
    - g) Revision period: guidance needed on timing for zeroing out negative equity, reconciliation between vintages, and treatment when DI subsequently provides support after zeroing out.
- Conceptual responses:
  - 19 out of 36 countries agreed with the proposed treatment; of these 19, six cannot apply either exception or cannot differentiate limited vs unlimited; seven are already zeroing out negative equity.
  - Only five out of 36 respondents in favour can both differentiate legal forms on liability and/or asset sides and apply exceptions.
  - About a dozen countries voiced conceptual concerns and oppose zeroing out negative equity; common reasons for keeping negative equity include:
    - Eliminating negative equity may reduce transparency and misrepresent local business conditions.
    - Zeroing out negative equity will distort economic reality and artificially increase a country's net IIP.
    - Legal form is less relevant in direct investment context; FDI statistics should reflect economic reality regardless of sign.
    - Bilateral asymmetries would increase due to differential information availability between parent and affiliate jurisdictions.
  - Additional exceptions suggested by some respondents:
    - Government participation in public limited liability companies can act as implicit guarantee.
    - Implicit guarantees may be offered by direct shareholders or other related global group entities.
    - Accounting for negative equity in central banks suggested by one country.
- Current practices and empirical evidence (34-country survey):
  - Only 9 WGIIS countries out of 34 zero out negative equity on the liability side; all but two of those also zero it out on the asset side. No relevant exceptions applied to this practice.
  - About half of these 9 countries do not back-cast the zeroing out, causing breaks in time series and interpretability issues.
    - One country that back-cast estimated that, in 2016, the change had a global impact on the IIP of -2.1% of the GDP.
  - For most of these 9 countries, negative equity was infrequent (occurring in less than 5% of surveyed companies) and accounted for less than 5% of total FDI liabilities.
  - Among countries that do not zero out negative equity, negative equity occurs in at least 15%, and occasionally higher than 25%, of all companies surveyed.
  - In most countries, negative equity accounts for up to 5% of total FDI liabilities, but in some it can go up to 15%.
  - Significant absolute values observed:
    - UK FDI associated with negative equity was nearly GBP 50 billion for both FDI liabilities and assets in 2021.
    - US negative liabilities equity amounted to USD 222 billion in negative equity positions in 2022.
  - In more than half of cases, countries that observe negative equity positions also observe positive intercompany debt positions, often resulting in overall positive FDI liabilities for the company.
- OECD WGIIS conclusions and policy recommendation:
  - Consultation confirmed BOPCOM Members' views: valid reasons exist to record negative equity, and zeroing out alters the economic reality FDI statistics aim to portray by hiding MNE financing patterns and artificially increasing a country's net IIP.
  - Implementation obstacles to proposed exceptions are substantial:
    - Difficulty differentiating limited from unlimited liability companies (near impossible on the asset side).
    - Application of exceptions would be resource-intensive, increase respondent burdens and be largely unfeasible on the asset side.
    - Lack of objective cross-country thresholds to identify “large enough” cases would increase asymmetries.
    - For jurisdictions that can implement exceptions, the exceptions would often be the norm, leaving considerable negative equity in statistics.
  - Recommendation: OECD strongly recommends maintaining the status quo — do not zero out negative equity as the default option for both limited and unlimited liability companies — and only zero out negative equity for very well-defined, easily implementable cases limited to:
    - a) mismeasurement or misreporting by the respondent (including cases for quasi-corporations where reporters estimate values or reporting system errors); countries already contact reporters to confirm or correct negative values.
    - b) affiliates that are liquidated: affiliates undergoing bankruptcy or restructuring and hence liquidated will have negative equity set to zero against positive price changes, but only once the procedure is over.

*Prepared by the BPM7 and 2025 SNA editorial teams; Annex II findings are those of the OECD Working Group on International Investment Statistics (WGIIS).*

### 1.      The recommended valuation methods for equity positions in macroeconomic statistics

### 1. The recommended valuation methods for equity positions in macroeconomic statistics

### Valuation methods and potential for negative valuations
- The six recommended fair valuation methods for unlisted equity positions are the same in the Balance of Payments and International Investment Position Manual, sixth edition (BPM6) (paragraph 7.16) and the 2008 System of National Accounts (2008 SNA) (paragraph 13.71).
- Guidance Note (GN) D.2 on Valuation of Unlisted Equity reduces the number of recommended methods to three: Own funds at book value (OFBV), recent transaction prices, and market capitalization (for instance, P/B-ratios).
- OFBV and market capitalization valuation methods can generate negative valuations.
- Recent transaction prices will usually not be negative where the investor is not liable for losses exceeding capital invested.
- The note is mostly relevant for unlisted equity because listed companies are regularly traded and investors are subject to strictly limited liability.

### Current standards and identified gap
- Current macroeconomic statistical standards do not provide clear guidance on treatment of negative equity positions.
- The Discussion Note (DN) on Equity: The Case of Negative Valuations noted that negative asset positions can arise for reasons other than negative valuations and are recorded in specific cases (e.g., short positions; transferable contracts and leases).

### Previous guidance and differing approaches
- In 2019 the IMF Committee on Balance of Payments Statistics agreed that negative equity positions should be allowed to be recorded unless attributable to erroneous reporting by respondents.
- Government Finance Statistics Manual 2014 (GFSM 2014) (paragraph 7.173) anticipates negative valuation of other equity for unincorporated enterprises (e.g., government quasicorporations) but states that for incorporated corporations with limited shareholder liability, the minimum value of their equity is zero.
- The European System of Central Banks Working Group on Financial Accounts concluded in 2019 that negative values for equity positions should not be recorded when liability is limited, irrespective of valuation method.

### DN recommendations summarized
- DN recommended:
  - Allow recording negative equity valuations for unlimited liability entities.
  - Generally zero out negative equity for limited liability entities, except for certain legal and economic cases.
  - Legal exceptions could include investor liability due to legal obligations, bilateral arrangements with authorities, or tax authority decisions.
  - DN presented two options for loan guarantees: treat them as legal obligations (allow negative equity up to guarantee amount) or not (do not allow recording negative equity for guarantees). The BPM7 and 2025 SNA editorial teams recommended treating loan guarantees like other legal obligations.

### Stock-flow consistency
- DN recommended ensuring stock-flow consistency by recording other price changes rather than other volume changes when negative equity is zeroed out.

---

### Preliminary discussions and stakeholder views
- In October 2023, the Advisory Expert Group on National Accounts (AEG) and the Committee unanimously agreed that negative equity positions may be recorded for unlimited liability entities.
- Most members agreed that stock-flow consistency should be ensured through recording other price changes rather than other volume changes if negative equity is zeroed out.
- AEG members mostly supported zeroing out negative equity for limited liability entities except for the legal and economic exceptions noted in the DN. Views were mixed on whether loan guarantees should be included under legal exceptions.
- Committee members emphasized:
  - Need to expand cases where negative equity is allowed, noting reputational reasons and implicit guarantees in FDI and domestic relationships.
  - Difficulty of distinguishing legal form (unlimited vs limited liability) in practice, especially for outward FDI.
  - Need to address treatment for central banks.
  - Support for treating loan guarantees like other legal obligations and allowing recording of negative equity up to amount of guarantee when affiliates have provided such guarantees.

---

### Options for treatment of negative equity valuations (limited liability entities)
- Option 1: Always zero out negative equity
  - Similar to GFSM 2014 and ESCB Working Group on Financial Accounts (2019).
- Option 2: Never zero out negative equity
  - Similar to Committee approach for FDI equity in 2019.
- Option 3: Zero out negative equity, except for certain legal and economic cases
  - Default: do not record negative equity.
  - Two versions regarding loan guarantees: one allows recording negative equity up to guarantee amount; the other does not.
- Option 4: Do not zero out negative equity, except for specific cases where the shareholder’s and its affiliates’ liability is strictly limited to the existing equity investment
  - Default: allow recording negative equity.
  - Zero out only when shareholder (and affiliates) would not suffer any other direct economic losses than the existing equity investment and would not be likely to assume any new financial obligations in bankruptcy or termination.
  - Examples of other direct economic losses include loan losses and realization of guarantees.
  - Willingness to assume new financial obligations could be related to reputational, societal, or other reasons.

---

### Recommendation and operational guidance
- The BPM7 and 2025 SNA editorial teams recommend Option 4:
  - Allow recording of negative equity positions as the default, zeroing out only in specific cases where liability is strictly limited.
  - 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 because there are no implicit guarantees or significant reputational risks.
  - Operational assumption: implicit guarantees or significant reputational risks are generally assumed to exist when a shareholder’s ownership share is at least 10 percent.
    - This implies negative direct investment equity positions should not be zeroed out unless a specific direct investor has no legally binding economic obligations, except existing equity investment, and a history of not assuming new financial obligations in the event of bankruptcy or termination of its direct investment enterprises.
  - Negative equity positions in public corporations should never be zeroed out to avoid hiding fiscal vulnerabilities.
  - This principle also applies to central banks in all economies, irrespective of formal ownership, given likelihood of government intervention to avoid far-reaching economic disruptions.

### Presentation and compilation guidance
- Compilers are encouraged to show negative equity positions as supplementary “of which” items under equity assets and liabilities to inform users and facilitate analytical rearrangements (e.g., treating negative assets as liabilities).
- Recording negative equity positions for limited liability entities aligns with fundamental principles of macroeconomic statistics: shareholders may need to pay to avoid obligations related to ownership at a point in time.
- If it becomes known that a shareholder did not incur losses and the amount had not been zeroed out, a valuation adjustment to zero could be made when that is known to the compiler, analogous to updates when a recent transaction price becomes available.

---

### Initial consultation feedback and editorial responses
- A draft of the Issue Note was sent to the OECD Working Group on International Investment Statistics (WGIIS) and the IMF Government Finance Statistics Advisory Committee (GFSAC).
- Overall strong support for draft recommendations; three main issues and editorial responses:
  - Issue 1: Consider recording a positive liability instead of a negative equity asset.
    - Editorial response: Some compilers prefer positive liability recording; as a compromise, the IN encourages showing negative equity as supplementary “of which” items under equity assets and liabilities to allow rearrangement by users.
  - Issue 2: Provide clear guidance on cases where negative equity can be zeroed out.
    - Editorial response: Operational guidance added—implicit guarantees or significant reputational risks are generally assumed when shareholder ownership share is at least 10 percent, so negative equity in direct investment enterprises should usually not be zeroed out.
  - Issue 3: Avoid reference to “SOEs.”
    - Editorial response: The IN now refers to the statistical concept “public corporations” rather than “SOEs.”

### Outcomes of the joint February 2024 AEG/Committee meeting
- In the joint February 2024 AEG/Committee meeting and subsequent written consultation, a majority of members supported the IN recommendations:
  - Negative equity positions should be allowed as the default option.
  - Negative equity should only be zeroed out in specific cases where liability is strictly limited.

*Prepared by the BPM7 and 2025 SNA editorial teams.*

### Annex II. Note from the OECD Working Group on International Investment Statistics (WGIIS)

### Annex II. Note from the OECD Working Group on International Investment Statistics (WGIIS)

### Background
- The IMF-ECB Discussion Note (DN) recommended recording negative valuation of equity for unlimited liability entities and generally zeroing out negative equity for limited liability entities, with legal or economic exceptions.
- At the IMF Committee on Balance of Payments Statistics (BOPCOM) meeting on 24-26 October 2023, Members raised conceptual and practical concerns; BOPCOM asked the OECD WGIIS to gather feedback on conceptual integrity, feasibility and materiality.
- The OECD launched two online surveys from 17 November 2023 to 5 January 2024 to collect evidence: one on conceptual/practical aspects (completed by 36 WGIIS countries, including eleven non-OECD members) and one on current practices/empirical evidence (completed by 34 countries, 11 non-OECD members).

### Key issues covered in the Discussion Note (DN)
- Core DN premise: limited liability protects investors from losses exceeding invested capital; therefore recording negative equity for limited liability companies is not meaningful unless exceptions apply.
- DN implied FDI compilers should differentiate limited versus unlimited liability companies for resident and foreign affiliates.
- Two proposed exceptions to zeroing out negative equity:
  - Legal exception: where investors may be liable for subsidiary debts due to legal obligations, bilateral arrangements with authorities, or tax authority decisions.
  - Economic exception: where non-equity liabilities of a limited liability entity exceed its assets and shareholder loans would bear losses in bankruptcy; negative equity could be recorded up to the amount of shareholder loans.

### Outcomes of the OECD surveys — practical and conceptual concerns
- Differentiation between limited and unlimited liability companies:
  - 12 out of 36 respondents cannot differentiate between limited and unlimited liability corporations on the liability side due to collection system limitations.
  - Only two respondents can differentiate the legal form of affiliates abroad on the asset side, and only with considerable delay, implying asymmetric treatment between assets and liabilities.
- Parent support and bankruptcy evidence:
  - Only four out of 36 countries report that the parent does not step in to cover affiliate debts.
  - Little evidence that affiliates leave the FDI universe because of bankruptcy due to negative equity.
- Application of the legal exception:
  - Only three out of 36 countries would be able to assess legal exceptions; court decisions and similar actions are time-lagged and resource intensive; loan guarantees identifiable only if disclosed in affiliate financial accounts.
- Application of the economic exception:
  - 11 out of 36 respondents could implement the economic exception (less than a third).
  - Debt from parent or fellow enterprises backing negative equity is a common occurrence across sectors and jurisdictions, notably in exploration and extraction affiliates.
  - Several countries strongly support the economic exception because negative equity often coexists with large intra-company loans and negative reinvested earnings (RIE).
  - Because more than two in every three countries cannot apply this exception, retaining negative equity is crucial to avoid exaggerating FDI positions and to preserve signals of likely financial engineering by parents.
- Additional practical concerns identified:
  - a) Exceptions are not exceptional: largest negative equity cases often fall under both exceptions, so default should be to keep negative equity.
  - b) High implementation cost: consistent implementation would be prohibitively expensive, lengthy and resource intensive; reversing burden of proof to allow negative equity by default is recommended by some respondents.
  - c) Timeliness: information to apply legal exception is available with considerable time lag, affecting revision policies.
  - d) Asymmetries: zeroing out negative equity on the outward/asset side is extremely difficult due to diverse jurisdictional company forms and limited court information.
  - e) Legal framework: in some jurisdictions unlimited liability companies are rare or absent; domestic law may mandate a positive lower bound for equity, requiring shareholder capital injections when thresholds are breached.
  - f) Identifying valid thresholds: majority of negative equity stock may be many small cases, making exception application practical only for the largest positions; no clear objective cross-country threshold exists.
  - g) Revision period: guidance needed on timing for zeroing out negative equity, reconciliation between vintages, and treatment when DI subsequently provides support after zeroing out.

- Conceptual concerns and survey responses:
  - 19 out of 36 countries agreed with the proposed treatment; of these 19, six cannot apply either exception or cannot differentiate limited vs unlimited; seven are already zeroing out negative equity.
  - Only five out of 36 respondents in favour can both differentiate legal forms on liability and/or asset sides and apply exceptions.
  - About a dozen countries voiced conceptual concerns and oppose zeroing out negative equity; these countries often observe frequent negative equity that accounts for non-negligible shares of total DI liabilities.
  - Representative reasons for keeping negative equity:
    - Investigations usually yield reasonable explanations from reporting entities.
    - Eliminating negative equity may reduce transparency and misrepresent local business conditions.
    - Zeroing out negative equity will distort economic reality and artificially increase a country's net IIP.
    - Legal form is less relevant in direct investment context; FDI statistics should reflect economic reality regardless of sign.
    - Bilateral asymmetries would increase due to differential information availability between parent and affiliate jurisdictions.
  - Additional exceptions suggested by a few respondents:
    - Government participation in public limited liability companies can act as implicit guarantee.
    - Implicit guarantees may be offered by direct shareholders or other related global group entities.
    - Accounting for negative equity in central banks was also suggested by one country.

### Current practices and empirical evidence (survey of 34 countries)
- Only 9 WGIIS countries out of 34 zero out negative equity on the liability side; all but two of those also zero it out on the asset side. No relevant exceptions are applied to this practice.
- About half of these 9 countries do not back-cast the zeroing out, causing breaks in time series and interpretability issues.
  - One country that back-cast estimated that, in 2016, the change had a global impact on the IIP of -2.1% of the GDP.
- For most of these 9 countries, negative equity was infrequent (occurring in less than 5% of surveyed companies) and accounted for less than 5% of total FDI liabilities.
- Among countries that do not zero out negative equity, negative equity occurs in at least 15%, and occasionally higher than 25%, of all companies surveyed.
- In most countries, negative equity accounts for up to 5% of total FDI liabilities, but in some it can go up to 15%.
- Significant absolute values observed:
  - UK FDI associated with negative equity was nearly GBP 50 billion for both FDI liabilities and assets in 2021.
  - US negative liabilities equity amounted to USD 222 billion in negative equity positions in 2022.
- In more than half of cases, countries that observe negative equity positions also observe positive intercompany debt positions, often resulting in overall positive FDI liabilities for the company.

### Conclusions and policy recommendation from the OECD WGIIS
- Consultation confirmed BOPCOM Members' views: valid reasons exist to record negative equity, and zeroing out alters the economic reality FDI statistics aim to portray by hiding MNE financing patterns and artificially increasing a country's net IIP.
- Implementation obstacles to the proposed exceptions are substantial:
  - Difficulty differentiating limited from unlimited liability companies (near impossible on the asset side).
  - Application of exceptions would be resource-intensive, increase respondent burdens and be largely unfeasible on the asset side.
  - Lack of objective cross-country thresholds to identify “large enough” cases would increase asymmetries.
  - For jurisdictions that can implement exceptions, the exceptions would often be the norm, leaving considerable negative equity in statistics.
- Recommendation: the OECD strongly recommends maintaining the status quo — do not zero out negative equity as the default option for both limited and unlimited liability companies — and only zero out negative equity for very well-defined, easily implementable cases limited to:
  - a) mismeasurement or misreporting by the respondent (including cases for quasi-corporations where reporters estimate values or reporting system errors); countries already contact reporters to confirm or correct negative values.
  - b) affiliates that are liquidated: affiliates undergoing bankruptcy or restructuring and hence liquidated will have negative equity set to zero against positive price changes, but only once the procedure is over.

### Annex III — Consultation summaries (WGIIS and GFSAC)
- WGIIS Consultation summary:
  - Most respondents agree with the conclusions and strongly support Option 4; the note is well supported by evidence provided from WGIIS surveys and wider state-owned enterprise context.
  - Comments included requests for clarifying why Option 1 and Option 2 are not considered, proposals for a fifth option (zero-out equity and create a shareholder liability and company asset), need for an operational definition of “strictly limited liability,” and guidance where equity for some shareholders is zeroed out but not for others.

- GFSAC Consultation summary:
  - Number of responses: 13.
  - Responses by option: Option 1 (Always zero out negative equity): 1; Option 2 (Never zero out negative equity): 0; Option 3 (Zero out negative equity, except for certain legal and economic cases): 1; Option 4 (Do not zero out negative equity, except for specific cases where the shareholder’s and its affiliates liability is strictly limited to the existing equity investment): 9; Other*: 2.  
    *Respondents who answered “other” argued that Option 3 and Option 4 were largely a mirror and proposed merging them; other comments favored recording negative equity only to the extent the shareholder has incurred legal or constructive obligations or made payments on behalf of the affiliate.
  - Majority support from GFSAC members for Option 4.
  - Key points raised by GFSAC members:
    - Inclusion of a negative equity asset in shareholders’ accounts may not best reflect economic situation; alternatives include presenting a positive liability of the holder (harmonization with International Public Sector Accounting Standards) or creating an explicit ‘claim on the shareholder’ asset and corresponding liability.
    - Importance of clear, precise guidance and delineation of constructive liabilities; the distinction between legal form and economic substance (constructive obligation) needs explicit treatment.
    - Suggestion to avoid or clarify reference to “SOEs” due to lack of standardized definition; prefer using “public corporations” where relevant.

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/issue-note-treatment-of-negative-equity-positions.pdf_