Financial Account (BoP item 995 = 500 + 600 + 910 + 700 + 802)




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c) Financial Account (BoP item 995 = 500 + 600 + 910 + 700 + 802)

The financial account covers all transactions associated with changes of ownership in the foreign financial assets and liabilities of an economy. The financial account contains five accounts differentiated by functional breakdown: Direct investment, Portfolio investment, Financial derivatives, Other investment and Reserve assets.



1. Direct investment (BoP item 500)

Direct investment implies that a resident investor in one economy has a lasting interest in, and a degree of influence over the management of, a business enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor (resident entity) and the enterprise (direct investment enterprise) and a significant degree of influence by the investor on the management of the enterprise. Direct investment comprises the initial transaction between the two entities - that is, the transaction that establishes the direct investment relationship – and all subsequent transactions between the entities and among affiliated enterprises, both incorporated and unincorporated.

Direct investment is classified primarily on a directional basis: resident direct investment abroad and non-resident direct investment in the reporting economy. Within this classification the BPM5 distinguishes three main components: equity capital, reinvested earnings and other capital.
Direct investment abroad (code 505)

505 = 510 + 525 + 530

505 = 506 + 530

Direct investment capital is capital provided by the resident direct investor – either directly or through other enterprises related to that resident investor – to the direct investment enterprise abroad or capital received by the resident direct investor from the direct investment enterprise abroad. Direct investment capital includes equity capital, reinvested earnings, and other capital.


Direct investment abroad - Equity (code 510)

Equity capital covers equity in branches, all shares (whether voting or nonvoting) in subsidiaries and associates, and other capital contributions. Equity capital also covers the acquisition by a direct investment enterprise of shares in its direct investor.


Direct investment abroad - Reinvested earnings (code 525)

Reinvested earnings are the direct investors’ shares (in proportion to equity held) of the undistributed earnings of the direct investment enterprise. These reinvested earnings are recorded as income with an offsetting capital transaction.


Direct investment abroad - Other capital (code 530)

Other capital covers the borrowing and lending of funds, including debt securities and trade credits, between direct investors and direct investment enterprises and between two direct investment enterprises that share the same direct investor. Debt claims on the direct investor by the direct investment enterprise are also recorded as direct investment capital.


Equity capital and reinvested earnings abroad (code 506)

Equity capital comprises equity in branches, all shares in subsidiaries and associates (except non participating, preferred shares that are treated as debt securities and included under direct investment-other capital), and other capital contributions. Reinvested earnings consist of the direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor.


Equity capital and reinvested earnings in the reporting economy (code 556)

Equity capital comprises equity in branches, all shares in subsidiaries and associates (except nonparticipating, preferred shares that are treated as debt securities and included under direct investment-other capital), and other capital contributions. Reinvested earnings consist of the direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor.



Direct investment in the reporting economy (code 555)

555 = 560 + 575 + 580

555 = 556 + 580

Direct investment capital is capital provided by the non-resident direct investor – either directly or through other enterprises related to that non-resident investor – to the resident direct investment enterprise or capital received by the non-resident direct investor from the resident direct investment enterprise. Direct investment capital includes equity capital, reinvested earnings, and other capital.


Direct investment in the reporting economy - Equity (code 560)

Equity capital covers equity in branches, all shares (whether voting or nonvoting) in subsidiaries and associates, and other capital contributions. Equity capital also covers the acquisition by a direct investment enterprise of shares in its direct investor.


Direct investment in the reporting economy - Reinvested earnings (code 575)

Reinvested earnings are the direct investors’ shares (in proportion to equity held) of the undistributed earnings of the direct investment enterprise. These reinvested earnings are recorded as income with an offsetting capital transaction.


Direct investment in the reporting economy - Other capital (code 580)

Other capital covers the borrowing and lending of funds, including debt securities and trade credits, between direct investors and direct investment enterprises and between two direct investment enterprises that share the same direct investor. Debt claims on the direct investor by the direct investment enterprise are also recorded as direct investment capital.


2. Portfolio investment (BoP item 600)

Portfolio investment records the transactions in negotiable securities with the exception of the transactions which fall within the definition of direct investment or reserve assets. The BPM5 first classifies portfolio investment by assets and liabilities. Within this classification it distinguishes four main components: equity securities, bonds and notes, money market instruments.


3. Financial derivatives (BoP item 910)

Financial derivatives are financial instruments that are linked to, and whose value is contingent to, a specific financial instrument, indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. Transactions in financial derivatives are treated as separate transactions, rather than as integral parts of the value of underlying transactions to which they may be linked.



4. Other investment (BoP item 700)

This is a residual category. Other investment is the investment which is not recorded under the other headings of the financial account (direct investment, portfolio investment, financial derivatives or reserve assets). It also encompasses the offsetting entries for accrued income on instruments classified under other investment. Like portfolio investment, other investment is first classified into assets and liabilities. Within the directional classification four types of instruments are identified: trade credits, loans, currency and deposits, other assets and other liabilities.




5. Official reserve assets (BoP item 802)

The definition of Eurosystem's international reserves was approved by the ECB Governing Council in March 1999. The reserve assets of the euro zone consist of the Eurosystem's reserve assets, i.e. the ECB's reserve assets and the reserve assets held by the national central banks of the participating Member States.


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