2.

in Annex III, Section 6.1 is replaced by the following: ‘6.1. Direct investment Direct investment is associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. Following international standards (BPM6), the direct or indirect ownership of 10 % or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. Based on this criterion, a direct investment relationship can exist between a number of related enterprises, regardless of whether the linkage involves a single or a number of chains. It can extend to a direct investment enterprise’s subsidiaries, sub-subsidiaries and associates. Once the direct investment is established, all subsequent financial flows/holdings between the related entities are recorded as direct investment transactions/positions. Equity capital comprises equity in branches as well as all shares in subsidiaries and associates. Reinvested earnings consist of the offsetting entry to the direct investor’s share of earnings not distributed as dividends by subsidiaries or associates, and earnings of branches not remitted to the direct investor and that are recorded under “investment income” (see 3.2.3). Direct investment equity and debt are further disaggregated according to the type of relationship between entities and according to the direction of the investment. Three types of direct investment relationships can be distinguished: (a) Direct investors’ investment in direct investment enterprises. This category includes investment flows (and stocks) from the direct investor to its direct investment enterprises (regardless of whether it is directly or indirectly controlled or influenced). (b) Reverse investment. This type of relationship covers investment flows (and stocks) from the direct investment enterprises to the direct investor. (c) Between fellow enterprises. This covers flows (and stocks) between enterprises that do not control or influence each other, but that are both under the control or influence of the same direct investor. With regard to the valuation of direct investment positions, the equity stocks listed in stock exchanges are valued at market prices. Conversely, in the case of unlisted direct investment companies, equity stocks are valued on the basis of book values using a common definition comprising the following accounting items: (a) paid-up capital (excluding own shares and including shares premium accounts); (b) all types of reserves (including investment grants when accounting guidelines consider them as company’s reserves); (c) non-distributed profits net of losses (including results for the current year). For equity shares of unlisted companies, the transactions recorded in the financial account may differ from the own funds at book value recorded in the IIP. Such differences are recorded as revaluations due to other price changes. To increase the consistency in the valuation of assets and liabilities, equity stocks in unlisted direct investment companies can alternatively be valued according to one of the other valuation methods mentioned in paragraph 7.16 of the BPM6, if at least one of the following cases applies: (a) at least one enterprise in a direct investment chain is listed on the stock-exchange, while at least one is not and this leads to a significant distortion in the net IIP of a company in the chain; in this case the market price of the listed company may be used as a reference for the valuation of the related unlisted companies; or (b) if differences occur in the recording of acquired goodwill along a chain of direct investment enterprises, leading to a significant distortion in the net IIP of the country in which the company in the middle of the chain is resident; or (c) if the accounts of enterprises in a direct investment chain are denominated in different currencies and exchange rate fluctuations lead to a significant distortion in the net IIP of the country in which the company in the middle of the chain is resident. If an alternative method is applied for valuing equity stocks in unlisted direct investment companies, the IIP compiler is encouraged to inform the compiler in the counterpart country of the alternative method and to cooperate with this compiler to minimise the risk of bilateral asymmetric recording. This information should be transmitted within the ESCB in the framework of existing arrangements, as well as published in the ECB’s publication “European Union balance of payments/international investment position statistical methods”, which is used to monitor the concepts, definitions and compilation methods applied by the euro area Member States (as described in Annex V). It is recommended as a best practice that all Member States should compile foreign direct investment equity stocks and reinvested earnings on the basis of the results of foreign direct investment surveys to be collected at least annually (1).