## Treatment of Negative Equity Positions

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**Canonical URL:** [Treatment of Negative Equity Positions](https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/bptt-fifth-meeting-presentaton-treatment-of-negative-equity-positions.pdf)

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### Background and scope
- Guidance Note D.2 narrows recommended valuation methods down to three:
  - Own funds at book value
  - Recent transaction price
  - Market capitalization (for instance, price-to -book value ratios)
- The issue to be tackled:
  - Valuation methods can generate negative valuations of equity positions.
  - Current statistical standards provide no explicit guidance on the treatment of such negative equity positions.
  - Negative positions allowed in other cases (e.g., short positions).

### Previous discussions
- IMF Committee on Balance of Payments Statistics (2019):
  - Allow recording of negative equity positions (except if reporting is erroneous).
- Government Finance Statistics Manual 2014:
  - Unincorporated entities: Allow recording of negative equity positions.
  - Incorporated corporationswith limited shareholder liability: Minimum value of equity position is zero.
- European System of Central Banks Working Group on Financial Accounts (2019):
  - Negative values for equity positions should not be recorded when the liability is limited.
- Guidance Note D.2 on Valuation of Unlisted Equity:
  - Recognizes the need for further research.

### Main conclusions from AEG/BOPCOM discussions
- Unlimited Liability Entities:
  - Full support in both groups for allowing the recording of negative equity
- Limited Liability Entities:
  - AEG: Support for zeroing out negative equity, expect for certain legal and economic exceptions (mixed views on loan guarantees)
  - BOPCOM: Support for allowing negative equity in most cases (should be the rule rather than the exception)
- Stock-Flow Consistency:
  - Strong support in both groups for ensuring consistency through revaluations rather than other volume changes if negative equity is zeroed out
- Other Issues:
  - Treatment of negative equity for central banks
  - Treatment of implicit guarantees

### The way forward
- BPM and SNA Editorial Teams:
  - Draft an Issue Note, laying out a compromise solution based on inputs from all key stakeholders.
  - Preliminary recommendations:
    - Allow the recording of negative equity positions as the default option and only zero out negative equity positions in specific cases where liability is strictly limited.
    - Never zero out negative equity in state-owned enterprises and central banks.
- Initial Consultation (ongoing):
  - OECD Working Group on International Investment Statistics (WGIIS)
  - IMF Government Finance Statistics Advisory Committee (GFSAC)
- BOPCOM/AEG Consultation (early February):
  - Updated Issue Note will be circulated for written consultation.
  - If necessary, the topic will be discussed at the joint AEG/BOPCOM meeting on February 20

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/bptt-fifth-meeting-presentaton-treatment-of-negative-equity-positions.pdf_