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Topics @ a Glance - Foreign Investment and Foreign Debt
Using Foreign Investment and Foreign Debt Statistics

Glossary of Terms

Asset and liability
In balance of payments and international investment statistics, a financial asset is generally in the form of a financial claim on the rest of the world that is either represented by a contractual obligation (such as a loan) or is evidenced by a security (such as bond). Monetary gold and Special drawing rights in the IMF are considered assets for balance of payments purposes. A liability represents a financial claim by the rest of the world on Australia. The distinction between assets and liabilities is fundamental in analysing the financial account and international investment position.

Australian investment abroad
Australian Investment Abroad is the sum of: direct investment abroad; portfolio investment assets; financial derivatives assets; other investment assets; and reserve assets.

Bonds and notes
Securities which are traded in financial markets with an original contractual maturity of more than one year. These securities provide the holder with unconditional rights to predetermined income on specified dates and to a fixed amount on a specified date as repayment of the principal, except for perpetual bonds and debentures.

Currency and deposits
Currency consists of foreign and domestic notes and coins in circulations, which are commonly used to make payments. Deposits include transferable deposits, which are exchangeable on demand and freely transferable and other deposits such as fixed term deposits and those transferable at short notice. Also included are banks' nostro and vostro accounts.

Debt is considered to be whatever is not equity.

Debt securities
These cover all tradeable securities, except those classified as equity securities. Debt securities include bonds, debentures, notes, etc., money market or negotiable debt instruments.

Debtor/Creditor principle
Under the debtor/creditor principle, transactions resulting from changes in financial claims of the compiling economy are allocated to the country of residence of the non-resident debtor, and transactions resulting in changes in financial liabilities are allocated to the country of residence of the non-resident creditor, even if the amounts are paid to or received from a different country. (see also Transactor principle).

Depository corporations
Includes banks (exclude the Reserve Bank) and other depository corporations. Banks include entities, which are licensed by APRA under the Banking Act. Other depository corporations are those non-bank financial intermediaries with liabilities included in the Reserve Bank of Australia's definition of broad money.

Direct investment
Investment undertaken by an entity resident in one economy in an enterprise resident in another economy with the objectives of obtaining or sustaining a lasting interest in the enterprise, and exercising a significant degree of influence in its management.

Direct investment enterprise
Incorporated or unincorporated enterprise in which a direct investor owns 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). Direct investment enterprises comprise those entities that are:
• branches (unincorporated enterprises wholly or jointly owned by a non-resident investor);
• subsidiaries (an enterprise in which a non-resident investor owns more than 50 percent); and
• associates (an enterprise in which a non-resident investor owns between 10 and 50 percent).
and are either directly or indirectly owned by the direct investor.

Direct investment relationship
A direct investment relationship is created when an enterprise resident in one economy owns 10 percent or more of the ordinary shares or voting power for an incorporated enterprise, or the equivalent for an unincorporated enterprise, that is resident in another economy. Direct investment enterprises that are considered to be in a direct investment relationship with a direct investor are also considered to be in direct investment relationships with each other.

Direct investor
An individual; an incorporated or unincorporated private or public enterprise; an associated group of individuals or enterprises; a government or a government agency; an estate or trust; a group of related individuals, or an international organisation which has an investment of 10 percent or more in a direct investment enterprise (that is, a subsidiary, associate or branch) operating in an economy other than the one in which the direct investor resides.

Dividends are the distribution of earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, cooperatives, and public corporations. it is a form of investment income to which shareholders become entitled as a result of placing funds at the disposal of corporations (e.g. By buying shares). Dividends are recorded on an accrual basis (on the date they are payable, on the date they are paid, or at some other point in time).

Domicile refers to the country of issue of securities.

Equity is that part of the issued capital of an enterprise which acknowledges a claim on the residual value of the enterprise after the claims of all other creditors have been met. It includes ordinary and participating preference shares, any reinvested earnings, and equity in unincorporated enterprises. It can be calculated as:
Equity = Direct investment equity capital and reinvested earnings +Portfolio investment equity securities (+ any equity securities held as reserve assets, should this ever occur).

Equity capital
Equity capital is that part of the issued capital of an incorporated enterprise, or the equivalent in an unincorporated enterprise, which acknowledges a claim to the income and residual value of the enterprise after the claims of all other creditors have been met.
Equity capital comprises:
(1). Equity in branches,
(2). All shares in subsidiaries and associates (except non-participating, preferred shares, which are treated as debt securities and included under direct investment, other capital), and
(3). Other capital contributions.

Equity securities
Ordinary and participating preference shares in an incorporated enterprise, equity in an unincorporated enterprise such as a branch, units in incorporated trusts, and non-withdrawable share capital of building societies and credit unions are included in equity securities. Non-participating preference shares are included in debt securities. See also "Debt securities".

Financial derivatives
Financial derivatives are financial instruments (such as interest and exchange rate swaps, forward foreign exchange contracts and forward interest rate agreements, options and futures contracts) that are linked to another specific financial instrument or indicator or commodity, and through which specific financial risks (such as interest rate risk, foreign exchange risk, equity and commodity price risks, credit risk etc.) can be traded in financial markets in their own right. The value of a financial derivative is based on the price of an underlying item, such as an asset or index. Unlike debt securities, no principal amount that has to be repaid is advance, and no investment income accrues. Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, and speculation.

Financial intermediary
For the purpose of balance of payments statistics, financial intermediaries are defined as being:
(1). other depository institutions (banks, other than the central bank);
(2). other financial intermediaries, except insurance companies and pension funds; and
(3). financial auxiliaries.
The definition would therefore include Special Purpose Entities (SPEs), the sole function of which is financial intermediation, and enterprises, such as security dealers, that provide services auxiliary to financial intermediation.

Financial transactions, or flows
Financial transactions, or flows, relate to the increase or decrease of your Australian enterprise group's financial liabilities to, or claims on, non-residents. Transactions are recorded at the traded price and converted to Australian dollars by using the midpoint of the buy and sell rates applicable at the time of the transaction. Transactions should be recorded on a gross basis, that is, before the deduction of commissions, brokerage fees and withholding taxes.

Foreign debt assets
A nation's gross debt claims on the rest of the world.

Foreign debt liabilities
A nation's gross debt liabilities to the rest of the world.

Foreign debt (net)
The net sum of foreign debt liabilities and foreign debt assets.

Foreign exchange
Foreign exchange consists of the Reserve Bank of Australia's holdings of securities, and currency and deposits. Currency and deposits consist of foreign and domestic notes and coin in circulation, transferable deposits which are exchangeable on demand and freely transferable, and other deposits such as fixed term deposits and those redeemable at short notice.

Foreign financial assets (and foreign financial liabilities)
Foreign financial assets and their matching liabilities are claims by a resident of one economy upon a resident of another economy. The existence of such claims, therefore, generally will be recorded on two balance sheets, namely that of the transactor against which the claims are held as liabilities, and that of the holder of the claims as assets. For example, foreign financial assets which are matched by liabilities in another transactor's records include resident owned corporate equities, bonds, and notes issued by foreign enterprises.

Foreign investment in Australia
Foreign Investment in Australia is the sum of: direct investment in Australia; portfolio investment liabilities; financial derivatives liabilities; and other investment assets.

Forward contract
A contractual obligation between two parties to exchange a particular good or instrument at a set price on a future date. The buyer of the forward agrees to pay the price and take delivery of the good or instrument and is said to be "long the forward", while the seller of the forward agrees to deliver the good or instrument at the agreed price on the agreed date. Collateral may be deposited, but cash is not exchanged until the delivery date. Forward contracts, unlike futures, are not traded on organised exchanges.

Forward foreign exchange contracts
Forward foreign exchange contracts involve the exchange of funds in one currency for funds in another currency at a specified rate at a future date.

Forward rate agreements
Forward rate agreements are arrangements associated with interest rates, in which two entities agree on a settlement cash flow based on the difference between an agreed interest rate and prevailing rates, at a future date, applied to a notional amount of principal.

A negotiable contract between two parties to exchange, or make or take delivery of a standardised amount of a commodity or securities at a specific date for an agreed price, under terms and conditions established by a regulated futures exchange where trading takes place. It is essentially a standardised forward contract that is traded on an organised exchange and subject to the requirements defined by the exchange.
Such contracts can cover commodities, equities, currencies, interest rates and other financial instruments, and are all considered to be financial in character. Where the two parties are residents of different countries, tradeable futures are recorded in both the balance of payments and international investment position in a manner similar to options.

Income on debt (Interest accrued)
This consists of interest payable on inter-company debt to/from direct investors from/to associated enterprises abroad. It covers interest on the borrowing and lending of funds (including debt securities and suppliers' credits) between direct investors and direct investment enterprise.

Income on equity
This comprises:
(1). dividends and distributed branch profits, and
(2). reinvested earnings and undistributed branch profits.

Interest payable/receivable
Interest payable/receivable refers to interest income which accrued during the quarter on non-tradeable instruments (i.e., on trade credits, loans, deposits, and other claims and liabilities other than securities). It is valued using quarterly compound rates for the interest rates specified in the loan or other contract which are then applied to the stock of assets or liabilities.

International investment position
The international investment position (IIP) is the stock or level of Australia's foreign financial assets and liabilities at a specified date. Foreign financial assets and liabilities in the international investment position statement are components of the balance sheet of an economy with the rest of the world.

Loans include the direct lending of funds from a creditor (lender) to a debtor (borrower) where the lender receives no security evidencing the transaction or receives a non-negotiable document or instrument. Included are loans to finance trade, other loans and advances (including mortgages), financial leases, repurchase agreements where the enterprise acquiring the securities does not become their registered holder, and use of IMF credit and loans from the IMF. The latter category comprises Australia's drawings on and repayments to the IMF's Compensatory Finance Facility. Australia repaid its last obligation under that facility in the December quarter 1983.

Net asset value is equal to total assets, including intangibles, less non-equity liabilities and less the paid up value of non-voting shares. Assets and liabilities should be recorded at estimated market value, rather than historical values.

Non-participating preference shares
Non-participating preference shares are a type of preference share where the holder has no entitlement to a share in the residual value on the dissolution of the issuing entity. Non-participating preference shares should be included as 'Long-term debt securities'.

Any economic entity (individual, enterprise or other organisation) ordinarily domiciled in a country other than Australia.
• Foreign branches and foreign subsidiaries of Australian enterprises are regarded as non-residents; and
• Residents of Norfolk Island and other external territories of Australia are regarded as non-residents for the purposes of this survey.

Opening and closing positions
The market value of Australia's stock of foreign financial assets and liabilities to non-residents at the beginning and end of a period, respectively. Also referred to as opening and closing levels (or stocks).

A contract granting the right, and not the obligation, to purchase or sell an asset during a specified period at an agreed-upon price (the exercise price or strike price).
A call option is a contract that gives the holder the right to buy from the option seller an asset at a specified price.
A put option is a contract that gives the holder the right to sell an asset at a predetermined price.
They can relate to equities, commodities, foreign currencies, interest rate, etc. Creating and exercising the option contracts, as well as secondary trading in options, all constitute transactions for balance of payments purposes where the holder and the writer are residents of different countries.
Options are traded both on exchanges and over the counter.

Other investment
A residual category that captures transactions not classified to direct investment, portfolio investment or reserve assets. Other investment covers trade credits, loans (including financial leases), currency and deposits, and other assets and liabilities.

Portfolio investment
Portfolio investment refers to transactions in equity and debt securities apart from those classified to direct investment and reserve assets.

Reinvested earnings
Reinvested earnings represent the undistributed income of resident direct investment enterprises attributable to their direct investment in another economy. Reinvested earnings are imputed transactions with offsetting entries in investment income and the financial account. They are separately categorised in the balance of payments but not in the international investment position, where they are included in equity capital.

Reserve assets
Foreign financial assets that are available to, and effectively controlled by, the central authorities for financing or regulating payments imbalances. Reserve assets comprise: monetary gold, SDRs, reserve position in the IMF, and foreign exchange (currency and deposits, and securities) held by the Reserve Bank.

Reserve position
Reserve position in the IMF consists of two elements:
(1). foreign currency amount that a country may draw from the IMF at short notice and without conditions, and
(2). indebtedness of the IMF under a loan agreement.

Residents include all economic entities that have a closer association (geographic and economic) with the territory of Australia than with any other territory. Residents include any individual, enterprise or other organisation ordinarily domiciled in Australia. See also "Non-resident" and "Territory".
• Australian registered branches and incorporated subsidiaries of foreign enterprises are regarded as Australian residents.

Residual maturity
Residual maturity refers to the time remaining until an asset or liability is due to be fully repaid.

Rest of the world (ROW)
The rest of the world consists of all non-resident institutional units that enter into transactions with resident units, or have other economic links with resident units.

Reverse investment
Reverse investment refers to the acquisition by a direct investment enterprise of a financial claim on its direct investor. Because direct investment is recorded on a directional basis, capital invested by the direct investment enterprise in its direct investor (reverse investment) is regarded as an offset to capital invested in the direct investment enterprise by a direct investor and its related enterprises, except in instances when the equity participation are at least 10 percent in both directions.

Short-term assets and liabilities
Assets and liabilities with a contractual maturity of one year or less.

Special drawing rights
Special drawing rights are international reserve assets created by the IMF to supplement the reserves of IMF member countries. they are not regarded as liabilities of the IMF. the creation or extinction (should the latter occur) of Special Drawing Rights is referred to as allocation/cancellation of Special Drawing Rights and is included in the other adjustment item of the international investment position.

A derivatives contract that involves a series of exchange payments, usually relating to interest rates or currencies, between two entities who agree to exchange cash flows over time on a notional amount of principal. Interest rate swaps involve the exchange of cash flows related to interest rates that are different in nature, e.g. fixed and floating rates, two different floating rates.

Territory refers to the geographical area under the jurisdiction of a sovereign country or state. Australia’s territory is defined to include the territories lying within its political frontiers and territorial seas, and in the international waters over which it has exclusive jurisdiction. It also includes its territorial enclaves abroad holding embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies etc., whether owned or rented by Australian governments with the formal agreement of the countries where they are located. Similar foreign enclaves located in Australia are excluded from Australia’s economic territory. In Australia’s economic statistics the external territories of Christmas Island, Cocos (Keeling) Islands and the Australian Antarctic Territory are regarded as part of the Australian economy, but Norfolk Island is not.

Trade credit claims
Trade credit claims refer to accounts receivable by Australian enterprise group from non-residents for exports of goods and services and prepayments made by Australian enterprise group for future imports of goods and services.

Trade credit liabilities
Trade credit liabilities refer to accounts payable by the Australian enterprise group to non-residents for imports of goods and services and prepayments received from non-residents for future exports of goods and services.

Trade credits
Trade credits are commercial credits extended to importers by exporters and prepayments made by importers to exporters.
Trade credit consists of claims and liabilities arising from the direct extension of credit by suppliers and buyers for goods and services transactions, and progress payments associated with such transactions. It does not include loans to finance trade.

An economic flow that reflects the creation, transformation, exchange, transfer, or extinction of economic value and involves changes in ownership of goods and/or financial assets, the provision of services, or the provision of labour and capital.
The transactions changes recorded in the IIP reconciliation statement are the same as the transactions recorded in the financial account of the balance of payments.

Transactor principle
There are two principles that may serve as the basis for geographic allocation of financial flows: the debtor/creditor principle and the transactor principle. Under the transactor principle, transactions resulting from changes in the claims and liabilities are allocated to the country of residence of the non-resident party to the transaction (the transactor), even if this is not the country of residence of the direct investment enterprise or direct investor. (see also Debtor/Creditor principle).

Type of investment
The type of investment classification used in the balance of payments financial account and the international investment position consists of five broad categories: Direct investment, Portfolio investment, Financial derivatives, Other investment, and Reserve asset.

Commonwealth of Australia 2008

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