## Chapter 12 11 Primary Earned Income Account ## Source details **Canonical URL:** [Chapter 12 11 Primary Earned Income Account](https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-chapter-12-earned-income-account.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-chapter-12-earned-income-account.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-chapter-12-earned-income-account.pdf.json) --- ### Overview and links to GDP/GNI - The primary earned income account records incomes earned by institutional units from production participation or ownership of assets needed for production, reflecting the allocation of primary earned income in the international external accounts. - Credit/revenue entries: primary earned income receivable by the compiling economy; debit/expenditure entries: primary earned income payable by the compiling economy. - The balance equals total primary earned income receivable less total primary earned income payable. - Cross-border primary earned income flows link gross domestic product (GDP) and gross national income (GNI): - The difference between GNI and GDP equals the difference of primary earned income receivable from nonresidents and primary earned income payable to nonresidents (often described as “net income from abroad”). - GNI is larger (smaller) than GDP if more (less) income is generated from provision of labor, financial resources, and nonproduced nonfinancial assets owned by residents to nonresidents than similar income payable to nonresidents. ### Structure and principal components - Main components (as in Table 11.12.1 structure): - Compensation Remuneration of employees - Investment income: - direct investment - portfolio investment - other investment - reserve assets - Income on equity and investment fund shares: Dividends and withdrawals from income of quasi-corporations; Reinvested earnings - Interest and similar returns - Investment income attributable to collective investment fund shareholders - Investment income attributable to policyholders in insurance, standardized guarantees, and pension funds - Rent - Taxes on production and on imports - Subsidies - The structure aligns with financial flows and positions to facilitate analysis of rates of return; rent and investment income attributable to policyholders are shown separately when relevant. ### Types of primary earned income (external accounts) - Distinct types: 1. compensation remuneration of employees; 2. dividends and withdrawals from income from quasi-corporations; 3. reinvested earnings; 4. interest and similar returns; 5. investment income attributable to policyholders in insurance, standardized guarantees, and pension funds; 6. rent; and 7. taxes on production and on imports, and subsidies on products and production. ### Compensation (Remuneration of employees): residence, valuation, components - Definition: total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done during the accounting period; measured for cross-border cases when employer and employee are resident in different economies. - Residence and employer–employee relationship: - Cross-border compensation arises only when a resident individual is employed by a nonresident or when a resident employs a nonresident individual. - Employer–employee relationship tests include control over what and how work is done; payment of social contributions by employer; entitlement to employee benefits; and tax treatment indicative of employment versus self-employment. - Remote work where employer and employee reside in different economies: payment should be recorded as remuneration of employees and recorded in the balance of payments only if employee is resident in a different economy than the employer. - Long-term assignments (one year or more): employees are residents of the economy in which they reside (unless diplomatic); employment attributed to the unit that effectively manages and controls the work; if unclear, employment attributed to the paying entity. - Measurement, timing, valuation: - Recorded on an accrual basis: value of remuneration the employee becomes entitled to for work undertaken during the period, whether paid in advance, simultaneously, or in arrears. - Unpaid remuneration: employer’s economy records accounts payable; employee’s economy records accounts receivable. - Components of remuneration: - (a) wages and salaries in cash — includes basic wages; overtime; allowances; bonuses; annual supplementary pay (such as “thirteenth month” pay); transportation allowances; holiday pay; housing allowances; includes any social contributions, income taxes, etc., payable by the employee even if withheld by the employer. - (b) wages and salaries in kind — goods, services, interest forgone, and shares (examples: meals; accommodation; sports, recreation, a car, holiday facilities; transportation; bonus shares); valued at market-equivalent price. - Interest forgone on reduced-rate loans recorded as a continuous stream equal to difference between interest charged and a market-equivalent interest charge. - Rerouting: benefits purchased by employer treated as if employer paid the amount to employee who then acquired the item; rerouting may affect resident vs nonresident classification. - (c) employers’ social contributions — included in remuneration of employees (see below). ### Employee stock options (ESOs) (paras 12.20–12.21) - ESOs are wages and salaries in kind valued by reference to the fair value of the equity underlying the ESO awarded. - Value at grant measures compensation recorded as accruing over the period between granting and vesting (see paragraph [8.41]); if options cover periods before grant, those periods are taken into account. - ESO value accumulates as compensation so that at vesting it equals ESO value at granting; changes in value at or after vesting are holding gains/losses (paragraph [9.30]). - Transactions and positions in ESOs recorded within financial derivatives and ESOs; supplementary item recommended where cross-border transactions in ESOs are significant. - Cross-border treatment: - If multinational parent directly provides ESOs to employees of a foreign subsidiary, ESO value recorded as compensation payable by the subsidiary, the actual employer (domestic transaction). - Liabilities of parent and acquisition of assets by employees recorded in respective economies’ international external accounts. - If ESO supplied free or below cost to subsidiary, impute a transaction between parent and actual employer for value of ESO (similar to transfer pricing treatment; see paragraphs 11.12.101–11.12.102). ### Employers’ social contributions (paras 12.22–12.22b) - Employers’ social contributions: payable by employers to social security funds and other social insurance schemes; examples: contributions/subsidies for pensions, life insurance, health insurance; allowances for dependents; payments to absent workers; severance. - Both actual and imputed social contributions included in remuneration. - Defined-contribution schemes: actual amounts payable by employers included in compensation. - Defined-benefit (including unfunded) schemes: employer contributions determined via actuarial calculations to yield contributions required to secure de facto entitlements — the current service increase (see paragraph [5.66]). - Recording convention: - Employers’ social contributions recorded as component of remuneration together with wages and salaries in cash and in kind. - Social contributions then recorded as being paid by employees as current transfers to social security schemes or other social insurance schemes (see paragraphs [12.35] and/or [13.32a]). ### Cross-border travel allowances and taxes (para 12.23) - Transportation allowances and income taxes for employees employed outside their economy of residence: - Travel allowances recorded on a gross basis as travel expenses/expenditures and not deducted from compensation. - Taxes on income similarly recorded gross as taxes on income; not deducted from compensation. ### Dividends and withdrawals from income of quasi‑corporations (paras 12.24–12.31, etc.) - Dividends: distributed earnings allocated to owners of corporate equity; return payable by corporations to shareholders; quoted as amount per share or percentage (dividend yield). - Income on nonparticipating preferred shares treated as interest (classified as debt instruments). - Share buybacks recorded as financial transactions (purchases of own shares), not as dividend distributions. - Withdrawals from income of quasi‑corporations (e.g., distributed branch profits) treated as dividends; exclude withdrawals realized by sale or disposal of assets (those are withdrawals from equity in financial account). - Investment fund equity: - Dividends and withdrawals by owners of quasi-corporations identified for equity in investment funds. - Investment in investment funds usually classified as portfolio investment but may occur in other functional categories; investment in funds never qualifies as direct investment even if investor equity stake exceeds 10 percent. - Owners’ earnings for equity in investment funds and direct investment include distributed income and reinvested earnings. - Timing and exceptional payments: - Dividends recorded when shares go ex-dividend; if ex-dividend unknown, payment date can be used. - Dividends recorded gross of withholding taxes; withholding taxes deemed payable by recipients. - Exceptional payments (superdividends) from accumulated reserves/sales of assets treated as withdrawals of equity recorded in financial account. - Liquidating dividends treated as withdrawals of equity in financial account. - Stock and bonus shares: - Stock dividends treated as dividend income and immediately reinvested in financial account. - Bonus shares in proportion to existing ownership not treated as transactions. ### Reinvested earnings: definition, scope, measurement, examples - Definition and rationale: - Reinvested earnings: earnings accruing to direct investors that are not paid out as dividends or withdrawals; attributes retained earnings to owners to yield consistent national disposable income and national saving measures. - Recorded only for equity in direct investment and investment in collective investment funds; attribution requires equity participation meeting the 10 percent threshold. - No reinvested earnings attributed for equity stakes below 10 percent; government-owned nonresident entities used solely for fiscal purposes do not give rise to reinvested earnings (paragraphs 8.24–8.26). - Measurement and components: - Reinvested earnings equal direct investor’s share of direct investment enterprise’s retained earnings or net saving (before reinvested earnings payable are deemed distributed) (paragraph 12.43). - Retained earnings/net saving components include: - Net operating surplus (operating revenue minus operating expenses) - Dividends receivable - Interest receivable - Rent receivable - Enterprise’s share of reinvested earnings of direct investment enterprises - Current transfers receivable - Less: Dividends payable; Interest payable; Rent payable; Taxes and other current transfers payable - Reinvested earnings measured after deducting corporate taxes payable and after deducting consumption of fixed capital (depreciation at current replacement cost) (paragraph 12.45). - Exclusions: costs/income from acquisition/sale of fixed assets (including R&D and own-account software treated as capital formation); realized or unrealized holding gains/losses and other changes in volume (e.g., write-offs); provisions for losses (bad debt provisions) not taken into account when determining net saving and reinvested earnings (paragraph 12.44). - Sign, recording, chain of ownership: - Reinvested earnings can be negative when enterprise incurs losses or when dividends declared exceed distributable income; negative earnings by direct investment abroad shown as negative income credit/receivable to the direct investor and negative income payable/debit to the enterprise’s economy (paragraph 12.46). - In chains of direct investment, reinvested earnings recorded only between a direct investor and its immediate directly owned enterprises; retained earnings include reinvested earnings derived from immediate direct investment enterprises and pass indirectly through the chain (paragraph 12.47). - Box example — chain of ownership (Box 1112.1): - Structure: A → B → C (100 percent subsidiaries); Enterprise A owned 95 percent by portfolio investors, Enterprise C owns 5 percent (reverse investment); none pays dividends; all earnings retained. - Earnings and reinvested earnings table: - Enterprise A: Earnings from own operations 100; Payable 0; Receivable 120 - Enterprise B: Earnings from own operations 40; Payable 120; Receivable 80 - Enterprise C: Earnings from own operations 80; Payable 80; Receivable 0 - Enterprise A’s reinvested earnings receivable consist of reinvested earnings receivable from immediate direct investment enterprise B; no reinvested earnings payable on reverse investment equity of C in A. - Investment income attributable to collective investment fund shareholders: - Includes dividends and retained earnings of collective investment funds attributable to shareholders; retained earnings treated as if distributed and deemed reinvested (paragraphs 12.37–12.38). - Consequence: saving of investment funds is always zero because retained earnings are treated as distributed and reinvested. - Fees: - Direct fees paid by shareholders to fund managers, brokers, custodians treated as services provided directly to shareholders (not as fund expenditure). - Indirect fees paid out of fund income/assets treated as services provided to shareholders and recorded as additional investment income attributable to shareholders (imputed dividends), then paid to service providers. - Numerical example (Box 12.1): - Investment fund in economy A yields income of 20; day-to-day costs 4 (indirect fees) financed from income; fund pays dividend of 5 to shareholders. - Economy A earned income account entries: - Investment income to the investment fund (with Economy C) 20 credit/revenue - Dividends paid by the investment fund (with Economy B) 9 debit/expenditure - of which, “imputed” dividends (with Economy B) 4 debit/expenditure - Retained earnings of the investment fund (with Economy B) 11 debit/expenditure - Note: savings of the investment fund is zero. - Economy B entries: - Investment income to the shareholder (with economy A) 20 credit/revenue - Made up of: - dividends 9 credit/revenue - of which “imputed” dividends 4 credit/revenue - reinvested earnings 11 credit/revenue - Imputed service charge (with economy D) 4 debit/expenditure - Dividends and retained earnings attributable to investment funds exclude holding gains/losses; holding gains/losses recorded as revaluations in IIP under other changes in financial assets and liabilities (paragraph 12.39). If dividends include distributions from holding gains, reinvested earnings may be negative. ### Interest and similar returns: definitions, accrual, approaches, and examples - Scope: interest receivable by owners of certain financial assets (deposits, debt securities, loans, other accounts receivable, some Islamic finance instruments); includes income on SDR holdings and allocations (paragraph 12.48). - Accrual basis: interest accrues continuously over time to the creditor on amount outstanding; accrued interest not yet paid becomes part of amount outstanding (paragraph 12.49). - Three instrument types for defining/measuring interest (paragraph [12.50]): - Domestic-currency-denominated fixed-rate instruments: future cash flows known at inception; interest is difference between debtor’s payments and creditor funds advanced. - Foreign-currency-denominated fixed-rate instruments: future cash flows determined in foreign currency; interest expressed in foreign currency converted into domestic currency at mid-point market exchange rate for periods in which interest accrues. - Index-linked instruments: payments linked to indicators with unknown future values; interest cannot be known at issue and may be determined only at redemption; treated as index-linked with special accrual guidance. - Interest on loans, deposits, accounts receivable/payable: - Determined by applying contractual interest rate to amount outstanding at each point in time during accounting period (paragraph [12.51]). - Indexation follows accrual rules described in paragraphs [11.12.59–11.12.65]. - Pure interest and FISIM: - Primary earned income account records “pure interest” by eliminating implicit financial intermediation services (FISIM) component from “actual interest” (paragraph [11.12.75]). - “Actual interest” payable to a financial intermediary includes service charge; subtract service charge to obtain interest recorded as investment income in international external accounts. - “Actual interest” receivable from a financial intermediary is increased by value of service received to obtain “pure interest” recorded as investment income. - “Pure interest” calculated using the reference interest rate (paragraphs [10.129–10.130]); actual interest charged/received by banks should be disseminated as a memorandum item. - Accrual of interest on nonperforming debt: - Interest should continue to accrue on nonperforming debt unless liability extinguished (paragraph [12.70]). - Arrears remain in same instrument until liability extinguished; interest accrues at original rate unless contract stipulates different arrears rate (paragraph [12.71]). - Extra charges for late payment regarded as interest and accrue until extinguished. - One-off guarantees activated transfer liability and interest accrual to guarantor; payments may create a claim on original debtor or be recorded as capital transfer (paragraph [12.72]). - Negative interest: - Negative interest observed on deposits of central banks/commercial banks and on government debt securities; recorded in balance of payments as negative debit/expenditure if payable and negative credit/revenue if receivable (paragraph 12.76a). - Economies with significant negative-yielding deposits may include an “of which” category showing negative interest income separately. - Interest on financial leases: treated as imputed loan from lessor to lessee; interest on imputed loan recorded in primary earned income account (paragraph 12.73). - Three approaches to interest on traded debt instruments (paragraph [12.52]): - Debtor approach: interest equals amounts debtors must pay over and above repayment of funds advanced; accrual determined at inception using original yield-to-maturity. - Creditor approach: interest based on discount rate implicit in instrument’s market value (current yield-to-maturity). - Acquisition approach: interest based on discount rate implicit in cost at which instrument was acquired. - Recording practice in international external accounts: interest recorded following debtor approach (paragraph [12.53]); creditor approach may be reported as supplementary item. - Debt securities with known cash flows — special cases and numerical examples: - Issued at par: total interest accruals equal periodic coupon payments; allocate coupon to period using daily compound formula (paragraph [12.54]). - Discounted instruments and zero-coupon bonds (Box 12.2 numerical example): - Bond issued Jan 1, Year 1, 100 repayable in five years, no coupons; market rate 10 percent. - Issue price: 62.09 (100/1.1^5) - Annual interest accruals and principal values: - Value of Debt Securities January 1 Year 1: 62.09; Interest Accrued: 6.21; Value of Debt Securities December 31 Year 1: 68.30 - Year 2: 68.30; Interest Accrued: 6.83; Value December 31 Year 2: 75.13 - Year 3: 75.13; Interest Accrued: 7.51; Value December 31 Year 3: 82.64 - Year 4: 82.64; Interest Accrued: 8.26; Value December 31 Year 4: 90.91 - Year 5: 90.91; Interest Accrued: 9.09; Value December 31 Year 5: 100.00 - Sum of interest over five years: 37.91 (difference between 62.09 and 100). - Interest accrual each year fixed at inception under debtor approach. - Numerical examples for bonds issued at par, discount, premium (Box 12.2a): - Example 1 (issued at par): Issue price 1,000; annual coupon payments 100; maturity 5 years; implied rate r=10%. Selected end-year figures include market values and revaluations (e.g., End year 1 market value 969.0; revaluation -31.0). - Example 2 (issued at discount): Issue price 900; annual coupon payments 73.6; redemption 1,000; implied r=10%. Selected end-year figures (e.g., End year 1 before coupon 990.0; after coupon 916.4; accrued interest 90.0; market value 887.1; revaluation -29.3). - Example 3 (issued at premium): Issue price 1,100; annual coupon payments 126.4; redemption 1,000; implied r=10%. Selected end-year figures (e.g., Start year nominal value 1,100.0; End year 1 accrued interest 110.0; coupon payment 126.4; market value 1,049.0; revaluation -34.6). - Notes: difference between accrued interest and coupon payment is capitalized into principal; revaluations sum to zero over lifetime. - Index-linked debt securities — accrual approaches (paragraphs 12.59–12.66): - Index-linkage types: (a) coupon indexation only; (b) maturity amount indexation only; (c) both coupon and maturity indexation. - When only coupon index-linked: full indexed amount treated as interest accruing during coupon period (12.60). - When maturity amount index-linked: two approaches: - (a) interest for period = change in value of amount outstanding between period end and beginning due to index movement (12.61(a)); - (b) fix rate of accrual at issuance using yield-to-maturity at issuance (12.61(b)). - Trade-offs: approach (a) simple but can yield negative interest in index declines; approach (b) avoids negative-interest periods and suits narrow indexes where holding-gain motive matters. - Foreign-currency indexation treated as denomination in that foreign currency; interest accrued in that currency and converted to domestic currency at mid-point market exchange rates (12.64). - Combined indexation: for broad-based indexation follow 12.60 + 12.61(a); for narrow indexes with holding-gain motive use 12.61(b). - Numerical examples — index-linked bonds: - Broad-based index (Box 12.3) — bond issued at price 1000, no coupons, five years, index start 100. Selected end-year figures: - Year 1: Index 107.0; Interest 70; Revaluation –12; Bond 1,058 - Year 2: Index 113.0; Interest 60; Revaluation –17; Bond 1,101 - Year 3: Index 129.0; Interest 160; Revaluation 58; Bond 1,319 - Year 4: Index 148.0; Interest 190; Revaluation 10; Bond 1,519 - Year 5: Index 140..3; Interest –77; Revaluation –39; Bond 1,403 - Year 1–5 total interest: 403; total revaluation over life: 0 - Narrow index (Box 12.4) — same bond but issuance market interest rate 8 percent. Selected end-year figures: - Year 1: Index 107.0; Interest 80; Revaluation –22; Bond 1,058 - Year 2: Index 113.0; Interest 86; Revaluation –43; Bond 1,101 - Year 3: Index 129.0; Interest 93; Revaluation 124; Bond 1,318 - Year 4: Index 148.0; Interest 101; Revaluation 100; Bond 1,519 - Year 5: Index 140..3; Interest 109; Revaluation –225; Bond 1,403 - Year 1–5 totals: Interest 469; Revaluation –66; total increase 469 – 66 = 403 - Notes: total increase over life equals index movement; debtor approach fixes interest at issuance rates and revaluations capture deviations. ### Stripped securities, securities lending, gold loans, manufactured interest - Stripped securities: - Unofficial strips: liabilities of strip issuer; original security continues to accrue interest per contract. - Official strips: obligations of original issuer; interest on official strips assumed to accrue at rate on underlying security though cash flows change. - Securities lending without cash collateral and gold loans: - Delivery transfers legal ownership to borrower though economic risks/rewards remain with original owner; lender receives fee determined by asset value and duration. - Fees for securities lending without cash collateral and gold loans accrue to security owner and are treated as interest, with corresponding entry in other accounts receivable/payable (12.68). - If fee payable to custodian, in principle fee payable to owner who is deemed to pay part/all to custodian; amounts accruing to custodians included under custodial services (financial services). - Manufactured interest and manufactured dividends: - If reverse transaction covers dividend or coupon dates, security taker must compensate security lender; compensating payments called “manufactured interest” and “manufactured dividends” recorded as negative credits/revenues for security taker who on-sold the securities (12.69). ### Investment income attributable to policyholders in insurance, standardized guarantees, and pension funds (paras 12.77–12.84) - Definition and scope: - Investment income attributable to policyholders: investment income receivable from investment of insurance technical reserves attributed to policyholders. - For standardized guarantee schemes, investment income on reserves shown as distributed to units paying fees. - Investment income payable on pension entitlements equals investment income on accumulated assets for defined contribution schemes and the unwinding of discount of entitlements for defined benefit schemes. - Rationale: observed transactions of insurers, guarantors, and pension funds do not always reflect underlying economic relationships; imputation of investment income attributable to policyholders necessary to reflect economic behavior. - Treatment by scheme: - Nonlife insurance: investment income on technical reserves treated as income attributable to policyholders, distributed in earned income account and paid back as premium supplement in transfers income account. - Life insurance: bonuses declared to life policyholders recorded as investment income receivable by policyholders and treated as premium supplements paid back to insurers in financial account. - Defined contribution pensions: measured same as investment income attributable to insurance policyholders (investment income on accumulated assets plus any rent). - Defined benefit pensions: investment income payable on entitlements measured as increase in benefits payable as date when entitlements become payable is closer; amount not affected by fund sufficiency or funding method. - Pension sponsor obligation: imputed investment income on shortfall recorded as income from pension manager to pension fund (negative in case of excess) (paragraph 12.82a). - Recording and premium supplements: - Investment income attributable to policyholders typically retained by insurers/guarantors/pension funds and treated as paid back by policyholders as premium supplements additional to actual premiums. - For casualty nonlife insurance, entries called premium supplements and reflected in deriving service charges and net premiums less service charges. - Allocation among policyholders could be in proportion to actual premiums. - Estimation and nonresident policyholders: - Investment income payable by resident insurers to nonresident policyholders can be estimated by multiplying gross premiums earned from nonresidents by ratio: - (investment income attributable to policyholders) / (gross premiums earned for all operations). - If ratios vary by line of business, calculations should be separate. - Investment income receivable by resident policyholders from nonresident insurers not readily observable; use ratios observed in similar cases for estimation. ### Direct, portfolio, other investment income, and reserve assets - Direct investment income presentation and disaggregation: - Direct investment income should be presented by type of income for income receivable on direct investment external assets and income payable on external direct investment liabilities (Table [11.12.2]). - Memorandum and supplementary items show types of direct investment income by three types of direct investment relationship; where categories insignificant or confidential, aggregate dissemination permitted. - Direct investment income can be classified by domestic institutional sectors for analytical value. - Box 11.12.5 — numerical example of reinvested earnings (Enterprise A): - Profit and Loss Statement (figures preserved): - Revenue: - 1. Sales of finished goods 20,000 - 1a. + increase in inventories of finished goods 500 - 2. Transport services provided 3,000 - 3. Repair services 6,000 - 4. Dividends 3,000 - 5. Interest on bonds 1,000 - 6. Profit on sale of property 1,000 - 7. Total revenue (1 through 6) 34,500 - Expenses: - 8. Raw materials purchased 12,000 - 8a – increase in inventories of materials 2,000 - 9. Salaries and wages 5,000 - 10. Office rental 500 - 11. Travel of employees 2,000 - 12. Fuel, electricity, other costs 500 - 13. Depreciation 1,000 - 14. Interest on loans 1,000 - 15. Bad debt provisions 2,000 - 16. Total expenses (8 through 15) 22,000 - 17. Net income (before taxes) 12,500 - 18. Taxes on income 4,000 - 19. Net income (after taxes) 8,500 - 20. Dividends payable 5,000 - Reinvested earnings calculation (method (a) and method (b) presented in chapter) result in reinvested earnings of 2,250 attributable to nonresident direct investors owning 50 percent equity. - Chapter notes practical data limitations: monthly/quarterly derivation may require extrapolation, ratios, or models. - Income on reverse investment and fellow enterprises: - Reverse investment income shown on a gross basis: both income receivable from claims on direct investors and income payable on liabilities to direct investment enterprises shown separately. - No reinvested earnings on reverse equity or between fellow enterprises because 10 percent threshold not met. - Transfer pricing: - Distorted transfer pricing that departs from arm’s length values affects direct investment income measures. - Where quantified with high certainty, adjust relevant entries to arm’s length values; adjustments must be made consistently across compilers in each economy involved. - Transfer pricing acting as hidden dividend: increase dividends by difference between market value and actual prices charged. - Transfer pricing acting as hidden investment: increase direct investment equity flows by difference between market value and actual prices charged. - Tabular breakdowns (expository): - Table 11.12.2 and Table 12.2 provide detailed breakdowns of direct investment income by type of investor relationship, with memorandum and supplementary items (including (m.) and (s.) items). - Portfolio investment income: - Includes income on equity securities and investment fund shares (distributed and reinvested earnings for investment fund shares) and income on debt securities (interest by type and maturity). - Classification consistent with instrument and functional classifications; can be disaggregated by domestic institutional sectors. - Other investment income: - Covers interest on deposits, loans, trade credit and advances, other accounts receivable/payable; income on equity and investment fund shares not classified elsewhere; investment income attributable to policyholders; interest on SDR allocations; fees for nonmonetary gold loans. - Equity income that does not qualify as direct or portfolio investment is classified under other investment income. - Other investment income should be further classified by type of instrument and by domestic institutional sectors. - Income on reserve assets: - Useful for rates-of-return analysis and to ensure other categories exclude reserves. - Includes income on equity and investment fund shares, and interest. - Fees on security lending and monetary gold loans and interest on unallocated gold accounts included under interest on reserve assets. - Interest receivable can be further classified by instrument type. - If not available for publication, income from reserve assets should be included in other investment–interest. - Interest on SDR holdings shown gross under income on reserve assets; interest payable on SDR allocations shown as income under other investment liabilities. *Source: Chapter 12 11 Primary Earned Income Account (IMF draft chapter).* ### Chapter 12 11 Primary Earned Income Account ### Chapter 12 11 Primary Earned Income Account ### Overview - Reference: 2008 2025 SNA, Chapter 78, The Distribution of Earned Income Accounts. - The primary earned income account records incomes earned by institutional units as a consequence of their involvement in production processes or ownership of assets needed for production. - In the SNA, primary distribution of earned income is recorded in: - the generation of earned income account (records primary earned income generated in the production process); and - the allocation of primary earned income account (records primary earned income allocated to institutional units for the provision of labor, financial assets, and natural resources nonproduced nonfinancial assets). - In the international external accounts, all primary earned income flows relate to the allocation of primary earned income account. - Credit/revenue entries reflect primary earned income receivable by the compiling economy and debit/expenditure entries reflect primary earned income payable by the compiling economy. - The balance on primary earned income equals total primary earned income receivable by the compiling economy less total primary earned income payable. ### Link to GDP and GNI - Cross-border primary earned income flows link gross domestic product (GDP) and gross national income (GNI). - GNI results from the economic process of income generation from production together with primary earned income distributions. - The difference between GNI and GDP equals the difference of primary earned income receivable from nonresidents and primary earned income payable to nonresidents (often described as “net income from abroad”). - GNI is larger (smaller) than GDP if more (less) income is generated from the provision of labor, financial resources, and natural resources nonproduced nonfinancial assets owned by residents to nonresidents than similar income payable to nonresidents. ### Structure and main components - Table 11.12.1 (expository) presents the main components and structure of the account, including: - Compensation Remuneration of employees - Investment income (direct investment, portfolio investment, other investment, reserve assets) - Income on equity and investment fund shares: Dividends and withdrawals from income of quasi-corporations; Reinvested earnings - Interest and similar returns - Investment income attributable to collective investment fund shareholders - Investment income attributable to policyholders in insurance, standardized guarantees, and pension funds - Rent - Taxes on production and on imports - Subsidies - The structure is consistent with corresponding financial flows and positions to facilitate analysis of rates of return. - Rent and investment income attributable to policyholders are shown separately when relevant. ### Types of primary earned income (international external accounts) - The international external accounts distinguish the following types of primary earned income: 1. compensation remuneration of employees; 2. dividends and withdrawals from income from quasi-corporations; 3. reinvested earnings; 4. interest and similar returns; 5. investment income attributable to policyholders in insurance, standardized guarantees, and pension funds; 6. rent; and 7. taxes on production and on imports, and subsidies on products and production. ### Compensation (Remuneration of employees) - Definition: total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period; measured for cross-border cases when employer and employee are resident in different economies. - Residence rules and employer-employee relationship: - Cross-border compensation arises only when a resident individual is employed by a nonresident or when a resident employs a nonresident individual. - Employer-employee relationship exists when there is an agreement (formal or informal) between an entity and an individual, normally voluntarily entered, where the individual works for the entity in return for remuneration. - If an individual is contracted to produce a given result (service contract), the relationship suggests self-employment rather than employer-employee. - Tests for employer-employee relationship include control over what shall be done and how; payment of social contributions by employer; entitlement to employee benefits; and the absence of tax treatment indicative of self-employment. - Cross-border employee types include seasonal or other short-term workers (less than one year), border workers, and nonresident domestic helpers employed by resident households (for less than one year). - Extraterritorial entities (embassies, consulates, military bases, international organizations) lead to classification of remuneration according to residence of the employing entity. - Remote work: when employers and employees reside in different economies, payment for remote work should be recorded as remuneration of employees; remuneration is recorded in the balance of payments only if the employee is resident in a different economy than the employer. - Long-term assignments (one year or more): technical assistance personnel employed by international organizations or governments on long-term assignments are residents of the economy in which they reside (unless diplomatic). Employees of parent enterprises working in an affiliated enterprise in another economy for one year or more are residents of the economy in which they reside. Employment should be attributed to the unit that effectively manages and controls the work; if unclear, the worker is considered employed by the entity that pays them. ### Measurement, timing, and valuation of compensation - Compensation Remuneration of employees is recorded on an accrual basis: measured by the value of remuneration in cash or in kind that an employee becomes entitled to receive for work undertaken during the relevant period, whether paid in advance, simultaneously, or in arrears. - Unpaid remuneration: the employer’s economy records accounts payable and the employee’s economy records accounts receivable. ### Components of remuneration - Remuneration has three main components: (a) wages and salaries in cash; (b) wages and salaries in kind; and (c) employers’ social contributions. - Wages and salaries in cash: - Include basic wages and salaries; extra pay for overtime, night work, and weekend work; cost of living allowances; local allowances; expatriation allowances; bonuses; annual supplementary pay (such as “thirteenth month” pay); allowances for transportation to and from work; holiday pay for official holidays or annual holidays; and housing allowances. - Exclude reimbursement by employers of expenditures made by employees to take up new or relocated jobs and expenditures on items needed to carry out work (these are treated as acquisitions by the employer of goods and services). - Include any social contributions, income taxes, etc., payable by the employee even if withheld by the employer for administrative convenience. - Wages and salaries in kind: - Consist of amounts payable in the form of goods, services, interest forgone, and shares to employees in return for labor input. - Examples: meals; accommodation; sports, recreation, a car, or holiday facilities for employees and their families; transportation to and from work; goods and services from the employer’s own production; bonus shares distributed to employees. - Valued at market-equivalent price (for example, a car at the actual cost to the employer). - Interest forgone on loans provided at reduced or zero rates is recorded as a continuous stream of remuneration payments, measured as the difference between the interest charged and a market-equivalent interest charge. - Rerouting may be involved: benefits purchased by the employer are treated as if the employer paid the amount to the employee who in turn acquired the item; rerouting may affect the resident-to-nonresident classification of the transaction. ### Coverage in subsequent sections - Section B discusses coverage, timing, and valuation issues for each type of primary earned income (compensation; dividends; reinvested earnings; interest; investment income attributable to policyholders in insurance, standardized guarantees, and pension funds; rent; taxes on production and on imports; and subsidies on products and production). - Section C explains classification of investment income by functional category of financial assets and liabilities (direct investment, portfolio investment, other investment, and reserve assets). *Source: Chapter 12 11 Primary Earned Income Account (IMF draft chapter).* ### 12.20 Employee stock options (ESOs) are a way of paying wages and salaries in kind. ESOs are valued ### Primary Earned Income Account — Employee stock options, Employers’ social contributions, Dividends, and Reinvested earnings ### Employee stock options (ESOs) (paras 12.20–12.21) - ESOs are a form of paying wages and salaries in kind and are valued by reference to the fair value of the equity underlying the ESO awarded. - The value of ESOs at the time of granting provides the measure of compensation/remuneration of employees that should be recorded as accruing over the period to which the option relates, generally the period between the granting and vesting dates (see paragraph [8.41]). - If options cover a period before the granting date, that earlier period should be taken into account when allocating compensation/remuneration. - The value of the ESO accumulates as compensation/remuneration is recorded so that at vesting date it has accumulated to the value of the ESO at granting. - Changes in the value of ESOs at or after the vesting date are not compensation/remuneration of employees but are holding gains and losses (see paragraph [9.30]). - Transactions and positions in ESOs are recorded within financial derivatives and ESOs, with a supplementary item for economies in which cross-border transactions in ESOs are significant. - Cross-border treatment: - When a multinational parent company directly provides ESOs to employees of a foreign subsidiary, the value of ESOs should be recorded as compensation/remuneration of employees payable by the subsidiary, the actual employer (a domestic transaction). - The liabilities of the parent company and acquisition of assets by the employees of the subsidiary in the form of ESOs are recorded in the respective economies’ international external accounts. - If the ESO is supplied free or below cost to the subsidiary, a transaction between the parent and actual employer should be imputed for the value of the ESO, similar to the treatment of transfer pricing (see paragraphs 11.12.101–11.12.102). ### Employers’ social contributions (paras 12.22–12.22b) - Employers’ social contributions are social contributions payable by employers to social security funds and other social insurance schemes to secure social benefits for their employees. - Social security schemes are operated by general government; other employer-related social insurance schemes may be operated by employers themselves, by an insurance corporation, or as an autonomous pension scheme. - Examples of social benefits include employers’ contributions or subsidies for pensions, life insurance, and health insurance; allowances for children, spouse, family, education, or other payments with respect to dependents; payments to workers absent from work because of illness, accidental injury, maternity leave, and severance payments. - Both actual and imputed social contributions are included in remuneration of employees. - Defined-contribution employer pension schemes: actual amounts payable by employers are included in the compensation/remuneration of employees. - Defined-benefit pension schemes (including unfunded): the amount of employers’ social contributions should be determined on the basis of actuarial calculations that yield contributions required to secure the de facto entitlements to the social benefits — the increase in entitlements resulting from the employee service in the current period (the current service increase) (see paragraph [5.66] for the definition of pension entitlements). - Recording convention: - Employers’ social contributions are recorded as a component of remuneration of employees together with wages and salaries in cash and in kind. - The social contributions are then recorded as being paid by the employees as current transfers to the social security schemes or other social insurance schemes (see paragraphs [12.35] and/or [13.32a]). ### Cross-border travel allowances and taxes (para 12.23) - Employees employed outside their economy of residence may incur transportation costs to and from work in the economy of employment for which they receive an allowance from their employer (see paragraphs [10.91–10.93]). - Nonresident employees (including remote workers) may be subject to payment of income taxes (see paragraph [132.28]). - Such flows should be recorded on a gross basis respectively as travel expenses/expenditures and taxes on income; they should not be deducted from compensation of employees. ### Dividends and withdrawals from income of quasi‑corporations (paras 12.24–12.31, 12.27a–12.27c, 12.28–12.30a, 12.31) - Dividends are distributed earnings allocated to owners of corporate equity for placing funds at the disposal of corporations; equity finance does not create a fixed monetary liability and does not entitle holders to a fixed income. - Dividends are the return payable by corporations to their shareholders or owners and are most often quoted as an amount per share or as a percentage of market value (dividend yield). - Income on nonparticipating preferred/preference shares is treated as interest income rather than dividend income because such shares are classified as debt instruments. - Share buybacks are recorded as financial transactions (purchases of own shares), not as dividend distributions. - Withdrawals from income of quasi-corporations (such as distributed branch profits) are treated as economically equivalent to dividends and included under dividends and distributed incomes. - Withdrawals from income of quasi-corporations do not include withdrawals realized by sale or disposal of the quasi-corporation’s assets; such transmittals are recorded as withdrawals from equity in the financial account. - Investment fund equity: - Dividends and withdrawals by owners of quasi-corporations are identified for equity in investment funds. - Investment in investment funds is usually classified as portfolio investment but may occur in other functional categories; for equity in investment funds and direct investment, owners’ earnings include both distributed income and reinvested earnings. - Investment in investment funds never qualifies as direct investment, even if the investor’s equity stake is greater than 10 percent. - Timing and exceptional payments: - Dividends paid by corporations to direct investors and withdrawals from income of quasi-corporations by their direct investors include distributions from the current period or accumulated reserves from ordinary earnings in previous periods. - Corporations often smooth dividend payments; for practical reasons no attempt is made to align dividend payments with earnings except when dividends are disproportionately large. - If dividends declared are greatly in excess of previous dividends and trends in earnings, the excess should be excluded from dividends and shown as a withdrawal of equity (see paragraph 8.23). - Exceptional payments from accumulated reserves or sales of assets (sometimes called superdividends) are treated as withdrawals of equity and recorded in the financial account. - For portfolio investment and other investment, exceptional payments made out of accumulated reserves or arising from non-operating activities are considered superdividends and treated as withdrawals of equity; the term superdividends does not apply to foreign direct investment except for exceptional payments due to sales of assets. - Payments from accumulated reserves to direct investors are treated differently from similar payments to portfolio or other investors, but the recording of dividends does not affect total direct investment income because direct investment income on equity comprises dividends/withdrawals and reinvested earnings. - Stock and bonus shares: - Stock dividends (payment of dividends in the form of new shares) are treated as dividend income in the primary earned income account and immediately reinvested in the financial account. - Bonus shares issued in proportion to existing ownership are not treated as transactions because no new resources are provided. - Liquidating dividends are treated as withdrawals of equity in the financial account on the convention that they likely involve previously existing equity rather than current income. - Recording: - Dividends are recorded at the time shares go ex-dividend; if ex-dividend date is unknown (e.g., unlisted equity), the payment date can be used. - Withdrawals from income of quasi-corporations are recorded when withdrawn by their owners. - Dividends and withdrawals from income of quasi-corporations are recorded gross of any withholding taxes, which are deemed payable by recipients. ### Reinvested earnings (paras 12.33–12.36d) - Definition and purpose: - Reinvested earnings are earnings accruing to direct investors that are not paid out as dividends or withdrawals from income of quasi-corporations; the concept attributes retained earnings to their owners and is important for consistent measures of national disposable income and national saving. - Reinvested earnings of collective investment funds are defined similarly. - Associated concepts (paras 12.33a–12.33b): - Entrepreneurial income is formally stated as: - Income earned by the production of goods and services (operating revenue minus operating expenses and depreciation) + Property income receivable (including dividends or withdrawals from income of quasi-corporations, reinvested earnings, interest and similar returns, rent, and other property income) - Property income payable excluding dividends or withdrawals from income of quasi-corporations and reinvested earnings. - Distributable income is formally stated as: - Entrepreneurial income + Current transfers receivable less current transfers payable - Adjustment for the change in pension entitlements relating to the pension scheme of that corporation. - Distributable income refers to income available to corporations for distribution to investors in proportion to equity participation; dividends reduce each investor’s share of distributable income by the amount received. - Retained earnings and attribution (paras 12.34–12.36c): - Retained earnings show net earnings from production and primary and secondary income transactions before attributing reinvested earnings; equal to net operating surplus plus primary income, current transfers receivable, and change in pension entitlements, minus primary income (excluding reinvested earnings payable to direct investors and owners of investment funds) and current transfers payable. - Corporations are institutional units separate from their owners; undistributed income is recorded as retained earnings or net saving of corporations (losses are negative net saving). Quasi-corporations are treated similarly (dividends replaced by withdrawals). - Where retention is a deliberate decision by owners to reinvest (not purely an arm’s-length retained earning), the part of retained earnings that belongs to direct investors is treated as distributed to owners and deemed reinvested by them. - Retained earnings of investment funds and the portion of retained earnings of direct investment enterprises belonging to direct investors are treated as distributed to owners who are then deemed to reinvest. - Recording conventions: - Reinvested earnings are recorded in the period in which the distributable income and dividend distribution or withdrawals accrue. - The imputation of income to direct investors and to the owners of investment funds is shown in the primary earned income account as “reinvested earnings” and the corresponding flow is recorded in the financial account as “reinvestment of earnings.” - Reinvestment of earnings is an imputed financial transaction; in position data, reinvestment of earnings is not shown separately but included implicitly in the total value of equity. - Scope note: - Reinvested earnings are recorded only for equity in direct investment and investment in collective investment funds, though it might be argued that the treatment should be consistent for other types of investment. *BPM7 Chapter 12 — Primary Earned Income Account* ### Chapter 12 11 Primary Earned Income Account ### Chapter 12 11 Primary Earned Income Account ### Reinvested earnings on direct investment - The chapter defines reinvested earnings as the direct investors’ share of the retained earnings of the direct investment enterprise, treated as being distributed and subsequently reinvested (paragraph 12.40). - Reinvested earnings are attributed only to direct investors who are in an immediate direct investment relationship with the enterprise, i.e., when equity participation meets the 10 percent threshold (paragraph 12.40). - Reinvested earnings are not attributed when equity participation provides less than 10 percent of the voting power (paragraph 12.40). - Government-owned nonresident entities used solely for fiscal purposes do not give rise to reinvested earnings because transactions are imputed between the government and the government-owned nonresident entity to reflect fiscal activities (paragraphs 8.24–8.26, referenced in paragraph 12.40). ### Rationale and scope - Rationale: attributing retained earnings of direct investment enterprises to direct investors is needed for consistent and comparable measures of national income and national saving because retention reflects an investment decision by the direct investor(s) (paragraph 12.41). - Scope limitation: reinvested earnings are recorded only for equity in direct investment and investment funds, not for other types of equity; the chapter notes the usefulness of measures of income and the current account with and without reinvested earnings for some analyses (paragraph 12.41). ### Measurement, components, and exclusions - Reinvested earnings represent the direct investors’ proportion, in terms of equity held, of earnings that foreign subsidiaries and associates do not distribute as dividends; undistributed earnings of branches are also considered reinvested earnings (paragraph 12.42). - Reinvested earnings equal the direct investor’s share of the direct investment enterprise’s retained earnings or net saving (before reinvested earnings payable are deemed distributed) (paragraph 12.43). - The chapter lists components comprising retained earnings/net saving (corresponding to SNA items) used to derive reinvested earnings (paragraph 12.43): - Net operating surplus (operating revenue minus operating expenses) - Dividends receivable - Interest receivable - Rent receivable - Enterprise’s share of reinvested earnings of any direct investment enterprises - Current transfers receivable - Less: Dividends payable; Interest payable; Rent payable; Taxes and other current transfers payable - Reinvested earnings are recorded in the period in which the retained earnings accrue (paragraph 12.43). - Reinvested earnings are measured on the basis of net saving before distributable income after dividends have been distributed to direct investors, or after withdrawals from income of quasi-corporations are deemed distributed (paragraph 12.44). - Reinvested earnings derive from entrepreneurial income and exclude: - Costs or income arising from acquisition or sale of fixed assets (including expenditure on research and development and own-account production of software treated as capital formation) (paragraph 12.44). - Realized or unrealized holding gains or losses and other changes in volume of assets (e.g., write-offs, uncompensated seizures) (paragraph 12.44). - Provisions for losses (e.g., bad debt provisions) are internal bookkeeping entries and should not be taken into account when determining net saving and reinvested earnings (paragraph 12.44). - Reinvested earnings are measured after deducting corporate taxes payable by the enterprise and after deducting consumption of fixed capital (depreciation measured at current replacement cost) (paragraph 12.45). - Business-account depreciation often differs from consumption of fixed capital used in national accounts; compilers should adjust historic-cost/book-value depreciation to current replacement cost where necessary (paragraph 12.45). - Payments of fines, penalties, and compensation can affect the calculation of reinvested earnings; large fines/penalties should be evaluated case-by-case (whether extraordinary), and only compensation payments considered current transfers are included in retained earnings (paragraph 12.45a, referencing paragraphs 13.54–13.55). ### Sign and recording, and chain of ownership - Reinvested earnings can be negative when a direct investment enterprise incurs losses or when dividends declared exceed net distributable income; negative earnings by direct investment abroad are shown as a negative income credit/receivable to the direct investor, and as negative income payable/debit to the enterprise’s economy (paragraph 12.46). - In a chain of direct investment relationships, reinvested earnings are recorded only between a direct investor and its immediate directly owned direct investment enterprises; retained earnings of an enterprise in the chain include reinvested earnings derived from its immediate direct investment enterprise and are passed indirectly through the chain to indirect direct investors (paragraph 12.47). ### Box example: Reinvested earnings with chain of ownership (Box 1112.1) - Structure: - Enterprise A has a 100 percent subsidiary Enterprise B; Enterprise B has a 100 percent subsidiary Enterprise C. - Enterprise A is owned 95 percent by portfolio investors, while Enterprise C owns 5 percent (reverse investment). - Scenario: none of the enterprises pays dividends during the period — all earnings are retained. - Earnings and reinvested earnings table (as stated in the example): - Enterprise A: Earnings from own operations 100; Payable 0; Receivable 120 - Enterprise B: Earnings from own operations 40; Payable 120; Receivable 80 - Enterprise C: Earnings from own operations 80; Payable 80; Receivable 0 - Notes: - Enterprise A’s reinvested earnings receivable consist of reinvested earnings receivable from its immediate direct investment enterprise, Enterprise B; Enterprise C’s reinvested earnings are indirectly taken into account through Enterprise B (paragraph 12.47). - No reinvested earnings are payable on the reverse investment equity of Enterprise C in Enterprise A (paragraph 12.99 referenced in the box notes). ### Investment income attributable to collective investment fund shareholders - Investment income attributable to owners of investment fund shares (units) includes dividends and retained earnings of collective investment funds attributable to shareholders; retained earnings treated as if distributed and then deemed reinvested (paragraphs 12.37–12.38). - Consequence: the saving of investment funds is always zero because retained earnings are treated as distributed and reinvested on behalf of shareholders (paragraph 12.38). - Fees treatment: - Direct fees paid by shareholders to fund managers, brokers, custodians, or other service providers are not treated as expenditure of the investment fund nor as income paid from the shareholder to the fund (paragraph 12.38a). - Indirect fees paid out of fund income or fund assets are treated as services provided directly from professional providers to the shareholders; such indirect fees are treated as an additional component of investment income attributable to shareholders (imputed dividends), and recorded under dividends and withdrawals from income of quasi-corporations, subsequently paid to service providers (paragraph 12.38a). - Numerical example (Box 12.1): - Investment fund in economy A yields income of 20; day-to-day costs of 4 (indirect fees) financed from income; the fund pays a dividend of 5 to shareholders. - Economy A earned income account entries: - Investment income to the investment fund (with Economy C) 20 credit/revenue - Dividends paid by the investment fund (with Economy B) 9 debit/expenditure - of which, “imputed” dividends (with Economy B) 4 debit/expenditure - Retained earnings of the investment fund (with Economy B) 11 debit/expenditure - Note: savings of the investment fund is zero. - Economy B services and earned income account entries: - Investment income to the shareholder (with economy A) 20 credit/revenue - Made up of: - dividends 9 credit/revenue - of which “imputed” dividends 4 credit/revenue - reinvested earnings 11 credit/revenue - Imputed service charge (with economy D) 4 debit/expenditure ### Dividends, retained earnings, and exclusions - Dividends and retained earnings attributable to owners of investment funds exclude holding gains and losses arising from fund investments; holding gains and losses are recorded as revaluations in the integrated IIP under other changes in financial assets and liabilities (paragraph 12.39). - If dividends from an investment fund include distributions derived from holding gains, reinvested earnings may be negative (paragraph 12.39). ### Interest and similar returns - Interest and similar returns are investment income receivable by owners of certain financial assets (deposits, debt securities, loans, other accounts receivable, and some Islamic finance instruments) for putting the financial asset at the disposal of another institutional unit; income on SDR holdings and allocations is included (paragraph 12.48). - Interest and similar returns are recorded on an accrual basis, accruing continuously over time to the creditor on the amount outstanding; accrued interest not yet paid becomes part of the amount outstanding (paragraph 12.49). - The accrual rate may be a percentage of the amount outstanding, a predetermined sum, a variable sum dependent on an indicator, or combinations thereof; in Islamic finance, interest-like income may be a predetermined share of profit (paragraph 12.49). - Economies with significant Islamic financial activity are encouraged to create a sub-category within interest and similar returns to present interest-like income specifically (paragraph 12.49a). *Chapter 12, Primary Earned Income Account, BPM7 draft chapter.* ### 12.50 For the purpose of defining and measuring interest, it is useful to distinguish between the follow- ### Chapter 12 Primary Earned Income Account — Interest: definitions and measurement ### Types of interest-bearing arrangements - The BPM7 chapter distinguishes three types of arrangements for defining and measuring interest (paragraph [12.50]): - Domestic-currency-denominated fixed-rate instruments: - At inception, contracting parties determine all future cash flows in domestic currency. - Interest is the difference between the sum of all debtor’s payments and the funds the creditor makes available to the debtor. - Information on amount outstanding and interest ratesfuture cash flows needed to calculate interest accruals is known at inception. - Foreign-currency-denominated fixed-rate instruments: - At inception, future cash flows are determined in the foreign currency of denomination. - Interest is defined as in the domestic-currency case, with interest expressed in foreign currency converted into domestic currency at the mid-point market exchange rate for the periods in which the interest accrues. - Debt instruments with both the amount to be paid at maturity and all periodic payments linked to a foreign currency are treated as though denominated in that foreign currency (see paragraph [11.12.50(b)]). - Index-linked instruments: - Payments (amount at maturity and/or periodic payments) are linked to indicators whose future values are not known at issue, so interest cannot be known at time of issue and may be determined only at redemption. - Indexed instruments include those linked to the consumer price index, a stock exchange index, a commodity price, and so forth. - All other debt instruments should be classified as fixed-rate. All other types of index-linked instruments, including those partially linked to exchange rates, are treated as being denominated in domestic currency for recording interest and other economic flows. - Calculation of interest accrual for index-linked instruments is described in paragraphs [11.12.59–11.12.65]. ### Interest on loans, deposits, and accounts receivable/payable - Interest accrual on deposits, loans, and accounts receivable/payable: - Determined by applying the contractual interest rate to the amount outstanding at each point in time throughout the accounting period (paragraph [12.51]). - Some instruments have fixed interest rates for the entire life; others have terms for changes in interest rates once or several times during life of instrument. - For each period, the relevant contractual interest rate should be used to calculate interest accrued in that period. - Loans and deposits with indexation follow accrual rules for indexation as described in paragraphs [11.12.59–11.12.65]. ### Pure interest and implicit financial services on loans and deposits (FISIM) - Treatment and measurement: - Financial intermediaries typically charge lower rates to depositors than they charge borrowers; the resulting interest margin finances expenses and operating surplus (paragraph [11.12.74]). - The primaryearned income account records “pure interest” by eliminating the implicit charges FISIM component from “actual interest” (paragraph [11.12.75]). - “Actual interest” payable to a financial intermediary includes the service charge, which should be subtracted to give interest recorded as investment income in the internationalexternal accounts. - “Actual interest” receivable from a financial intermediary is increased by the value of the service received to obtain the “pure interest” recorded as investment income in the internationalexternal accounts. - The “pure interest” is calculated using the reference interest rate; the concept and application of the reference interest rate are described in paragraphs [10.129–10.130]. - “Actual interest” charged or received by banks should be disseminated as a memorandum item for analytical purposes. ### Accrual of interest on nonperforming debt - Treatment and guidance: - Amount outstanding of nonperforming debt remains a legal liability of the debtor, so interest should continue to accrue unless the liability has been extinguished (paragraph [12.70]). - Creditors are encouraged to provide supplementary information on accrued interest on nonperforming debt when significant and quantifiable; metadata should explain the method adopted for defining nonperforming debt. - Arrears on debt repayments not paid on due dates should continue to be shown in the same instrument until the liability is extinguished (paragraph [12.71]). - For arrears arising from a debt contract, interest should accrue at the same interest rate as on the original debt unless a different rate for arrears was stipulated in the original contract. - If terms or classification change when a loan goes into arrears, record the change as a reclassification in the other changes in [financial] assets and liabilities account; if the contract is renegotiated, record transactions as creation of a new instrument. - Extra charges incurred when a debtor fails to pay within agreed credit terms should be regarded as interest and accrue until the debt is extinguished. - When a one-off guarantee covering a nonperforming debt is activated, the guarantor assumes the liability and interest accrual becomes the liability of the guarantor; payments by the guarantor may create a claim on the original debtor or, if no claim is obtained, may be recorded as a capital transfer (paragraph [12.72]). ### Negative interest - Observations and recording: - Negative interest can be observed in deposits of central banks and commercial banks and on government debt securities, and for index-linked bonds if the index declines (paragraph 12.76a). - In the balance of payments: - Negative interest payable on financial instruments is recorded as a negative debit/expenditure. - Negative interest receivable is recorded as a negative credit/revenue. - Economies with significant negative-yielding deposits could consider including an “of which” category showing negative interest income separately in national publications. - Negative interest can also occur for securities under a reverse transaction (paragraph 12.76c). ### Interest under high inflation - Measurement issues: - High inflation affects measurement and interpretation of interest; domestic-currency nominal interest may be significantly higher than foreign-currency rates because of compensation for loss of purchasing power (paragraph 12.76). - Accounting under high inflation raises pervasive issues across the accounts; Chapter 209, Section E Satellite Accounts and Other Extensions, of the 202508 SNA provides guidance on compiling and presenting data in conditions of high inflation. ### Interest on financial leases - Financial lease treatment: - Financial leases are treated as loans (paragraph 12.73). - The lessor is treated as making a loan to the lessee equal to the market value of the asset; that loan is gradually paid off over the lease period. - The rate of interest on the imputed loan is implicitly determined by the total rentals payable over the life of the lease relative to the market value of the asset at lease initiation. - The initial imputed loan and subsequent repayments are recorded in the financial account of lessor and lessee; interest payable on the imputed loan is recorded in the primaryearned income account. - A numerical example of calculation of items for financial leases is shown in [Box A6b.1] (referenced). ### Interest on debt securities—approaches and recording - Three approaches to defining and measuring interest for traded debt instruments (paragraph [12.52]): - Debtor approach (paragraph [11.12.52(a)]): - Interest equals amounts debtors must pay over and above repayment of funds advanced. - Interest accrual for the entire life is determined by conditions set at inception using the original yield-to-maturity; a single effective yield established at issuance is used for each period to maturity. - Creditor approach (paragraph [11.12.52(b)]): - Interest follows from applying, at any point in time, the discount rate implicit in the instrument’s market value (current yield-to-maturity); effective interest rate varies with market price changes. - Acquisition approach (paragraph [11.12.52(c)]): - Interest follows from applying the discount rate implicit in the cost at which the instrument was acquired; effective interest rate changes only if the security is resold. - Recording practice in international external accounts (paragraph [12.53]): - Interest is recorded following the debtor approach described in paragraph [11.12.52(a)]. - Interest calculated according to market rates (creditor approach) may be reported as a supplementary item for analysis of rates of return. - Valuation and recording of transactions in the financial account and positions in balance sheets do not depend on the chosen interest calculation method; acquisitions and disposals are recorded at transaction prices and positions at market prices or fair values. ### Debt securities with known cash flows and special cases - Issued at par (paragraph [12.54]): - For securities issued and redeemed at the same price (issued at par), total interest accruals over life equal the periodic coupon payments; for fixed coupons, allocate coupon to relevant period using a daily compound formula. - Discounted instruments and zero-coupon bonds (paragraph [12.55] and Box 12.2): - Debtor has single repayment at maturity covering principal and accumulated interest; issued at a discount (issue price less than redemption). - The difference between redemption and issue price is interest to be allocated over accounting periods; interest accruing each period is recorded in the primaryearned income account and increases the debtor’s liability in the financial account. - Numerical example for a zero-coupon bond (Box 12.2): - A bond is issued on January 1, Year 1, with 100 repayable in five years, with no coupons. - If the market rate of interest at the time of issue is 10 percent for that maturity and credit rating, then the bond will be issued at a price of 62.09 (that is, 100/1.1^5). - Annual interest calculations and associated values of the principal: - Value of Debt Securities January 1 Year 1: 62.09; Interest Accrued: 6.21; Value of Debt Securities December 31 Year 1: 68.30 - Year 2: 68.30; Interest Accrued: 6.83; Value December 31 Year 2: 75.13 - Year 3: 75.13; Interest Accrued: 7.51; Value December 31 Year 3: 82.64 - Year 4: 82.64; Interest Accrued: 8.26; Value December 31 Year 4: 90.91 - Year 5: 90.91; Interest Accrued: 9.09; Value December 31 Year 5: 100.00 - Notes: - According to the debtor approach (see paragraph 11.12.52(a)), the interest in each period is fixed at inception. - The sum of interest over the five years is 37.91, equal to the difference between 62.09 (price at issue) and 100 (price at redemption). - Interest accrued each year increases in line with the growing accumulated value of accrued interest. - The corresponding entry to the interest accrued is an increase in debt securities in the financial account. Values of the bond during the period are unknown because of holding gains and losses; fluctuations in market interest rates will change value but not the calculation of interest. - Deep-discount and premium instruments (paragraphs [12.56–12.57]): - Deep-discount bonds that also require periodic coupon payments: determine interest rate so present value of future coupon and principal payments equals issue price; accrued interest may be approximated by summing periodic coupon interest plus interest attributable to amortization of the discount. - Amortization of the discount (difference between redemption and issue prices) can be calculated by summing daily amortizations for the reporting period; daily amortization facilitates allocation across reporting periods. - For securities issued at a premium, the difference between redemption and issue price is amortized over life of instrument and reduces the amount of interest accruing in each period, analogous to the discounted case but with opposite sign. *Source: BPM7 Chapter 12, Primary Earned Income Account (International Monetary Fund).* ### Chapter 12 11 Primary Earned Income Account ### Chapter 12 11 Primary Earned Income Account ### Accrual treatment for stripped securities - Unofficial strips are issued by a third party without authorization of the original issuer and are liabilities of the strip issuer; the original debt securities continue to accrue interest according to the term specified in the contract. - Official strips (issued with authorization of the original issuer through a strip dealer it appoints) remain direct obligations of the original issuer; interest on official strips is assumed to accrues at the rate on the underlying security, but cash flows change because of issuance of zero-coupon bonds and not at the rate prevailing at the time of stripping. - References for further discussion and examples include Handbook on Securities Statistics (2015), Annex 1, and Monetary and Financial Statistics Manual and Compilation Guide (2016), Annex 5.2 for examples with semi-annual accruals. ### Numerical examples of interest accrual on bonds (Box 12.2a) - Example 1: A fixed interest rate bond issued at par - Issue price: 1,000; annual coupon payments: 100; original maturity: 5 years; redemption price: 1,000. - Implied interest rate, r=10% - Table 12.2a Stocks and flows during the life of a bond issued at par (selected rows preserved): - Start year: nominal value 1000 - End year 1: a. before coupon payment 1100; b. after coupon payment 1000; c. accrued interest (c) (= b(t-1)*r) 100; d. coupon payment 100; e. market value (b) 969.0; f. revaluation (a) -31.0 - End year 2: e. market value 1025.3; f. revaluation 56.3 - End year 3: e. market value 1054.2; f. revaluation 28.9 - End year 4: e. market value 982.1; f. revaluation -72.1 - End year 5: e. market value 1000.0; f. revaluation 17.9 - Example 2: A fixed interest rate bond issued at discount with periodic payments - Issue price: 900; annual coupon payments: 73.6; discount payment at redemption; original maturity: 5 years; redemption price: 1,000 - Implied interest rate, r=10% - Table 12.2b Stocks and flows during the life of a bond issued at discount (selected rows preserved): - Start year: nominal value 900 - End year 1: a. before coupon payment 990.0; b. after coupon payment 916.4; c. accrued interest 90.0; d. coupon payment 73.6; e. market value 887.1; f. revaluation -29.3 - End year 2: a. before coupon payment 1,008.0; b. after coupon payment 934.4; c. accrued interest 91.6; d. coupon payment 73.6; e. market value 958.5; f. revaluation 53.4 - End year 3: e. market value 1006.5; f. revaluation 28.2 - End year 4: e. market value 958.6; f. revaluation -69.7 - End year 5: a. before coupon payment 1,073.7; b. after coupon payment 1,000; c. accrued interest 97.6; d. coupon payment 73.6; e. market value 1000.0; f. revaluation 17.4 - Example 3: A fixed interest rate bond issued at a premium with periodic payments - Issue price: 1,100; annual coupon payments: 126.4; discount payment at redemption; original maturity: 5 years; redemption price: 1,000 - Implied interest rate, r=10% - Table 12.2c Stocks and flows during the life of a bond issued at a premium (selected rows preserved): - Start year: nominal value 1,100.0 - End year 1: a. before coupon payment 1,210.0; b. after coupon payment 1,083.6; c. accrued interest 110.0; d. coupon payment 126.4; e. market value 1,049.0; f. revaluation -34.6 - End year 2: e. market value 1,105.3; f. revaluation 74.3 - End year 3: e. market value 1,094.2; f. revaluation 8.7 - End year 4: e. market value 982.1; f. revaluation -90.3 - End year 5: a. before coupon payment 1,126.3; b. after coupon payment 1,000; c. accrued interest 102.4; d. coupon payment 126.4; e. market value 1,000.0; f. revaluation 41.9 - Notes (methodological): - In each year the difference between the accrued interest and the coupon payment is capitalized (reinvested into the principal amount). Revaluations equal the difference between current market value and the sum of the previous market value and capitalized interest. Revaluations over the lifetime of the bond sum to zero. - Apart from initial and final amounts, market value amounts in the examples are chosen arbitrarily. - Interest accrues for every period (daily, monthly, quarterly and annually). If coupon timing differs from reporting period end-date, further accrued interest applies in each period up to final payment. ### Index-linked debt securities: approaches to accrual (paragraphs 12.59–12.66) - Index-linkage arrangements distinguished: - (a) indexation of coupon payments only with no indexation of amount to be paid at maturity, - (b) indexation of the amount to be paid at maturity with no indexation of coupon payments, and - (c) indexation of both the amount to be paid at maturity and coupon payments. - Treatment when only coupon payments are index-linked (12.60): - The full indexed amount is treated as interest accruing during the coupon period. If coupon date has not passed, movement in the index during the reporting period portion covered by the coupon can be used to calculate accrual. - Two approaches when amount payable at maturity is index-linked (12.61): - (a) Calculate interest accruing in an accounting period as the change in the value of the amount outstanding between period end and beginning due to movement in the relevant index. - (b) Fix the rate of accrual at issuance: interest equals the difference between issue price and the market expectation at inception of all debtor payments; records yield-to-maturity at issuance as accruing over the life of the instrument; deviations of the index from original expectation produce holding gains or losses that do not normally cancel out over the life of the instrument. - Trade-offs (12.62–12.63): - Approach (a) is simple but can yield negative interest in periods of index declines and behaves like holding gains/losses; works well for broad-based indexation (e.g., consumer price index or nominal GDP). - Approach (b) avoids counter-intuitive negative interest periods and suits narrow indexes that combine interest income and holding gain motives (e.g., commodity price, stock price, gold price); interest for life of instrument may not equal difference between issue price and redemption value. - Foreign-currency indexation (12.64): - Instruments indexed to foreign currency are treated as denominated in that foreign currency; interest accrues in that currency and is converted to domestic currency using mid-point market exchange rates; end-of-period exchange rate used to value outstanding amounts in the international investment position; exchange rate and interest rate changes are treated as revaluations. - Combined indexation of coupons and maturity amount (12.65): - For broad-based reference items, interest accrual = coupon indexation attributable to the period (per 12.60) + change in value of amount outstanding between end and beginning due to index movement (per 12.61(a)). - For narrow indexes with holding gain motive, determine accrual by fixing yield-to-maturity at issuance (12.61(b)). ### Numerical example—broad-based index (Box 12.3) - Bond issued Jan 1, Year 1 at price 1000 for five years, no coupons, indexed to a broad price index; index at beginning = 100. - End-of-period summary (selected figures preserved): - Start year 1: Broad Price Index 100; Bond 1000 - Year 1: Index 107.0; Interest 70; Revaluation –12; Bond 1,058 - Year 2: Index 113.0; Interest 60; Revaluation –17; Bond 1,101 - Year 3: Index 129.0; Interest 160; Revaluation 58; Bond 1,319 - Year 4: Index 148.0; Interest 190; Revaluation 10; Bond 1,519 - Year 5: Index 140..3; Interest –77; Revaluation –39; Bond 1,403 - Year 1–5 total interest: 403; total revaluation over life: 0 - Notes: - Total interest over five years (403) determined by movement of the index (40.3 percent increase). - Revaluations arise from market condition changes but sum to zero over life when repaid at indexed value. - Negative interest can arise in periods when the index declines. - Corresponding entry to interest accrued is an increase in debt securities in the financial account. - Fluctuations in market interest rates change bond value but do not affect calculation of interest. ### Numerical example—narrowly based index (Box 12.4) - Same numerical bond as Box 12.3 but treated as indexed to a narrow price index; market interest rates at issuance 8 percent per annum. - End-of-period summary (selected figures preserved): - Start year 1: Broad Price Index 100; Bond 1000 - Year 1: Index 107.0; Interest 80; Revaluation –22; Bond 1,058 - Year 2: Index 113.0; Interest 86; Revaluation –43; Bond 1,101 - Year 3: Index 129.0; Interest 93; Revaluation 124; Bond 1,318 - Year 4: Index 148.0; Interest 101; Revaluation 100; Bond 1,519 - Year 5: Index 140..3; Interest 109; Revaluation –225; Bond 1,403 - Year 1–5 totals: Interest 469; Revaluation –66; total increase 469 – 66 = 403 - Notes: - Total increase over five years (469 – 66 = 403) determined by index movement (40.3 percent increase). - Under the debtor approach, interest in each period is fixed at issuance rate: Year 1 interest 80 (8 percent of 1000), Year 2 interest 86 (8 percent of 1000 + 80), Year 3 interest 93 (8 percent of 1000 + 80 + 86), etc. - Revaluations over life reflect difference between actual index increase and the compound increase at market rate of interest; revaluations also arise from market condition changes. - Market interest rate fluctuations change bond value but not the calculation of interest under this approach. ### Fees on securities lending and gold loans; manufactured interest (paragraphs 12.67–12.69) - Securities lending without cash collateral: - Delivery of securities for a given time period transfers legal ownership to borrower who may on-sell the securities; economic risks and rewards remain with original owner; lender receives a fee determined by value of underlying asset and duration of reverse transaction. Warrants may sometimes be lent. - Gold loans: - Delivery of gold for a time period (physical gold or unallocated gold accounts); legal ownership transfers to borrower while price risk remains with lender; borrower typically a market dealer, broker, gold producer, or industrial user; a comparable fee is paid to original owner. - Accounting treatment (12.68): - Securities and monetary gold are financial instruments; fees for securities lending without cash collateral and gold loans accrue to security owner and are treated as interest, with corresponding entry in other accounts receivable/payable. Fees on loans of nonmonetary gold are treated as interest as a simplifying convention. - If fee initially payable to a custodian, in principle all of the fee is payable to the owner who is deemed to pay part or all to the custodian in a separate transaction; amounts accruing to custodians are included under custodial services (financial services). - Investment income while securities are under reverse transactions (12.69): - Economic owner continues to record dividends and accrual of interest even when legal ownership changes under a reverse transaction or when a custodian has on-sold the securities to a third party. - If reverse transaction covers dividend or coupon payment dates, the security taker typically must compensate the security lender; such compensating payments are called “manufactured interest” and “manufactured dividends.” Manufactured interest and dividends are recorded as negative credits/revenues for a security taker who has on-sold the securities. - Treatment of reverse positions is on the research agenda. ### Pure interest and FISIM (paragraphs 11.12.74–11.12.75) - Financial intermediaries typically pay lower rates to depositors than they charge borrowers; interest margins defray expenses and provide operating surplus—this implicit service is FISIM (financial intermediation services indirectly measured). Measurement and treatment described in paragraphs 10.126–10.136. - Primary income account records “pure interest” by removing the FISIM component from “actual interest.” - Actual interest payable to a financial intermediary includes a service charge which should be subtracted to obtain interest recorded as investment income. - Actual interest receivable from a financial intermediary is seen as having had a service charge already deducted; therefore actual interest receivable is increased by the value of the service to obtain interest recorded as investment income. - “Pure interest” is calculated using the reference interest rate; concept and application of the reference interest rate are described in paragraphs 10.129–10.130. - Actual interest charged or received by banks is needed for analytical purposes (e.g., debt sustainability analysis and analysis of rates of return) and should be disseminated as a memorandum item. *International Monetary Fund — Chapter 12: Primary Earned Income Account* ### 5. Investment income attributable to policyholders in insur- ### 5. Investment income attributable to policyholders in insurance, standardized guarantees, and pension funds ### Definition and scope (paragraphs 12.77–12.79) - Investment income attributable to insurance policyholders in insurance consists of investment income receivable from the investment of insurance technical reserves, which is attributed to the policyholders. - For an institutional unit operating a standardized guarantee scheme against fees, investment income earned on the reserves of the scheme should be shown as distributed to the units paying the fees. - Investment income payable on pension entitlements is: - investment income received from the investment of assets accumulated for defined contribution schemes, and - the unwinding of the discount of the entitlements for defined benefit schemes. - Technical reserves, provisions and entitlements represent a liability of the insurer, issuer of standardized guarantees, and defined benefit pension fund, and a corresponding asset of the policyholders and beneficiaries (see paragraphs referenced for definitions). ### Rationale for imputation (paragraph 12.78) - Observed transactions of insurance corporations, standardized guarantee schemes, and pension funds do not always reflect the underlying economic relationships with policyholders; therefore, rearrangement (imputation) is necessary so underlying economic behavior is reflected. - One rearrangement is the imputation of investment income attributable to policyholders in insurance corporations, standardized guarantee schemes, and pension funds. ### Treatment by type of scheme and insurance (paragraphs 12.80–12.83, 12.82a) - Nonlife insurance: - Technical reserves represent prepayment of premiums and reserves against outstanding claims. - Investment income on these technical reserves is treated as income attributable to policyholders, distributed in the earned income account and paid back to the insurance corporation as a premium supplement in the transfers income account. - Life insurance: - Insurers’ liability equals the present value of expected claims from existing policyholders. - “Bonuses” declared to life policyholders should be recorded as part of investment income receivable by the policyholders and are treated as premium supplements being paid back to the insurance corporations in the financial account. - Income earned by insurers from assets held against these liabilities is attributed to policyholders as investment income on their claims on life insurance corporations. - Defined contribution pension schemes: - Investment income payable on pension entitlements is measured the same as for investment income attributable to insurance policyholders (equal to the investment income on accumulated assets plus any income from renting land and buildings owned by the fund). - Defined benefit pension schemes: - Value of entitlements is the present value of future payments. - Investment income payable on pension entitlements is measured as the increase in benefits payable because the date when entitlements become payable is closer. - The amount of the increase is not affected by whether the pension scheme actually has sufficient funds to meet obligations nor by how it is funded (investment income or holding gains). - Changes in model assumptions are recorded under other changes in volume (see paragraph reference). - Pension sponsor obligation: - A pension sponsor may be obliged to meet liabilities of a defined benefit scheme in case of shortfall. - Imputed investment income on this shortfall is recorded as income from the pension manager to the pension fund, which would be negative in the case of an excess (paragraph 12.82a). ### Recording, retention, and premium supplements (paragraphs 12.83–12.84) - Investment income attributable to policyholders is typically retained by insurers, guarantors, and pension funds in practice. - It is therefore treated as being paid back by the policyholders to insurers, guarantors, and pension funds in the form of premium supplements that are additional to actual premiums payable under insurance and pension policies. - For casualty nonlife insurance (including standardized guarantees), corresponding entries are called premium supplements and are taken into account in deriving service charges and net premiums less service charges. - The total amount of investment income attributable to policyholders is allocated among policyholders; allocation could be in proportion to actual premiums payable by them. ### Estimation and nonresident policyholders (paragraph 12.84) - Investment income payable by resident insurers, guarantors, and pension funds to nonresident policyholders can be estimated by multiplying the gross premiums earned from nonresidents by the ratio: - (investment income attributable to policyholders) / (gross premiums earned for all operations). - If these ratios vary by line of business (reinsurance, marine, life, pension funds, standardized guarantees, etc.), calculations should be made separately. - Investment income receivable by resident policyholders from nonresident insurers, guarantors, and pension funds is not readily observable; ratios of investment income attributable to policyholders to premiums observed in other similar cases could be used for estimation. --- ### Related material in the same chapter (brief pointers to adjacent topics) - The chapter also addresses Rent (Section 6) and Taxes and subsidies on products and production and on imports, and subsidies (Section 7), including: - Rent covering income receivable by the owner of nonproduced nonfinancial assets for use by another institutional unit, accrual recording of rent, and treatment of subleasing and notional direct investment enterprises (paragraphs 12.85–12.90a). - The inclusion of taxes on production and on imports and subsidies on products and production in the primary earned income account and distinctions between taxes on products and other taxes on production (paragraphs 12.91–12.94). - Investment income by functional asset category and direct investment income are discussed subsequently, including the 10 percent threshold for attributing reinvested earnings to direct investors (paragraphs 12.95–12.97). *Source: IMF, Chapter 12, Primary Earned Income Account.* ### 12.98 Investment income associated with various types of financial instruments is discussed in Section ### Chapter 12 11 Primary Earned Income Account ### Direct investment income: presentation and disaggregation - Chapter 12 states that direct investment income should be presented by type of income for both income receivable on holdings of direct investment external assets and income payable on external direct investment liability positions, as shown in Table [11.12.2]. - The table includes memorandum items and supplementary information showing various types of direct investment income by three types of direct investment relationship. - Interest can be broken down further by type of financial instruments. - A detailed presentation of direct investment income (memorandum and supplementary items of Table 11.12.2): - Allows explicit links to financial instruments. - Expands analytical value for detailed analysis of direct investment relationships. - Where second and/or third categories are insignificant or confidential, Chapter 12 permits dissemination of only aggregate data for all three types combined. - Direct investment income can be further classified by domestic institutional sectors (Chapter 4, Section D) for direct investors abroad and for direct investment enterprises in the reporting economy. - Direct investment income by institutional sector and other supplementary disaggregations (e.g., by ownership and by size) can provide analytically useful information on types of enterprise and main partner economies involved in flows. ### Box 11.12.5 — Numerical example of calculation of reinvested earnings (Enterprise A) - Context: Nonresident direct investors own 50 percent of the equity of Enterprise A. - Profit and Loss Statement of Enterprise A (figures preserved exactly): - Revenue: - 1. Sales of finished goods 20,000 - 1a. + increase in inventories of finished goods 500 - 2. Transport services provided 3,000 - 3. Repair services 6,000 - 4. Dividends 3,000 - 5. Interest on bonds 1,000 - 6. Profit on sale of property 1,000 - 7. Total revenue (1 through 6) 34,500 - Expenses: - 8. Raw materials purchased 12,000 - 8a – increase in inventories of materials 2,000 - 9. Salaries and wages 5,000 - 10. Office rental 500 - 11. Travel of employees 2,000 - 12. Fuel, electricity, other costs 500 - 13. Depreciation 1,000 - 14. Interest on loans 1,000 - 15. Bad debt provisions 2,000 - 16. Total expenses (8 through 15) 22,000 - 17. Net income (before taxes) 12,500 - 18. Taxes on income 4,000 - 19. Net income (after taxes) 8,500 - 20. Dividends payable 5,000 - Reinvested earnings calculation methods shown (figures preserved exactly): - (a) Adjusting net income after taxes: - Net income after taxes (line 19 = 8,500) - – dividends (line 20 = 5,000) - – revenue not part of output, primary earned income or secondary transfer income (namely, holding gains, line 6 = 1,000) - + expenses not being a transaction (namely, bad debt provisions, line 15 = 2,000) - = 49,500, multiplied by 0.5 = 2,2504,750. - -dividend payable to direct investors (5000 multiplied by 0.5 = 2,500) = 2,250 - (Note: Chapter 12 presents the intermediate arithmetic and the resulting reinvested earnings of 2,250.) - (b) From the national accounting relationships: - First calculate entrepreneurial income: - operating revenue (line 1+line 1a + line 2 + line 3; which gives 29,500); - – operating expenses; (line 8-line8a + line 9 +line 10 + line 11 + line 12; which gives 13,00018,00) - – consumption of fixed capital depreciation (line 13, which gives 1,000) - + primary earned and secondary transfer property income receivable (line 4 + line 5, which gives 4,000); - – primary earned and secondary transfer property income payable (line 9 + line 14 + line 18 + line 20; which gives 15,0001,000) - =13,500 (entrepreneurial income) - Next calculate distributable income: - Entrepreneurial income (13,500) - + current transfers receivable (none) - -current transfers payable (line 19 = 4,000) - =9,500 (distributable income) - Finally calculate reinvested earnings on direct investment: - * Distributable income all multiplied by the direct investor’s share in the equity of the enterprise = 4,5009,500 multiplied by 0.5 = 4,750 - = 2,250 - direct investor’s share of dividends (=line 20* multiplied by 0.5 = 2,500) =2,250 - Chapter 12 notes that in practice data for these calculations may not always be available monthly or quarterly, and derivation may require extrapolation, ratios, or models. ### Income on reverse investment and fellow enterprises - Reverse investment: - Defined in paragraph 6.40 (Chapter 12). - Investment income on reverse investment is shown on a gross basis: both income receivable from claims on direct investors and income payable on liabilities to direct investment enterprises are shown separately. - No reinvested earnings on reverse equity because the 10 percent threshold has not been met. - Income on investment between fellow enterprises: - No reinvested earnings on equity between fellow enterprises because the 10 percent threshold has not been met. - Treatment of fellow enterprises in directional principle presentation discussed in paragraph 6.43 and Box 6.4. ### Transfer pricing: implications and treatment - Transfer pricing that departs significantly from arm’s length prices usually relates to shifting resources between related enterprises and affects direct investment income measures. - Motives for distorted transfer pricing include income distribution, equity buildups or withdrawals, and shifting income to an affiliate in a lower tax economy. - Examples include provision of goods and services without explicit charging, or at understated or overstated values. - Where distorted transfer pricing is identified and quantified with a high degree of certainty, the relevant entry should be adjusted to an arm’s length value (see paragraphs 3.77–3.78). - Adjustments must be made consistently in the accounts of compilers in each economy involved; compilers are encouraged to cooperate and exchange information to avoid asymmetrical bilateral recordings. - Adjustments to flows require corresponding entries as described in the Chapter. - Specific guidance on effects of transfer pricing: - (a) if a direct investment enterprise is overinvoiced on a good or service provided by the direct investor or (b) if a direct investor is underinvoiced on a good or service provided by the direct investment enterprise, then the transfer pricing acts as a hidden dividend from the direct investment enterprise, so dividends should be increased by the difference between the market value of the goods and services and the prices actually charged. - (a) if a direct investment enterprise is underinvoiced on a good or service provided by the direct investor or (b) if a direct investor is overinvoiced on a good or service provided by the direct investment enterprise, then the transfer pricing acts as a hidden investment in the direct investment enterprise, so direct investment equity flows should be increased by the difference between the market value of the goods and services and the prices actually charged. ### Tabular breakdowns presented in Chapter 12 - Table 11.12.2 (Detailed Breakdown of Direct Investment Income) and Table 12.2 (Breakdown of Direct Investment Income, showing memorandum (m.) and supplementary (s.) items) set out components including: - Direct investment income: income on equity and investment fund shares; dividends and withdrawals from income of quasi-corporations; reinvested earnings; interest. - Classification by investor relationship: - 1. Direct investors in direct investment enterprises (income on equity and investment fund shares; income on equity other than investment fund shares; dividends and withdrawals from income of quasi-corporations; reinvested earnings; income on investment fund shares; dividends; reinvested earnings; interest — by type of financial instruments). - 2. Direct investment enterprises in direct investors (reverse investment) — analogous breakdown. - 3. Between fellow enterprises — analogous breakdown. - Memorandum and supplementary items include: - (m.) Direct investor in direct investment enterprises - (m.) Direct investment enterprises in direct investor (reverse inv.) - (m.) Between fellow enterprises - (s.) if ultimate controlling parent is resident - (s.) if ultimate controlling parent is nonresident - (s.) if ultimate controlling parent is unknown - Note: These tables are expository; for standard components, see Appendix 9 (as stated in the Chapter). ### Portfolio investment income - Portfolio investment income includes income flows between residents and nonresidents arising from positions in equity and debt securities other than those classified under direct investment or reserve assets. - Two first-level types: - Income on equity securities and investment fund shares (income on investment fund shares includes both dividends and reinvested earnings; income on equity securities other than investment fund shares includes only distributed earnings (dividends)). - Income on debt securities (interest further classified by types of debt security and by maturity). - Detailed classification ensures consistency with instrument and functional classifications of financial assets and liabilities. - Portfolio investment income can be further classified by domestic institutional sectors (Chapter 4, Section D) for owners and issuers, and by other supplementary disaggregations (e.g., foreign sector, currency of denomination). ### Other investment income - Covers flows between resident and nonresident institutional units regarding: - Interest on deposits, loans, trade credit and advances, other accounts receivable/payable. - Income on equity and investment fund shares not classified in other functional categories. - Investment income attributable to policyholders in insurance, standardized guarantees, and pension funds. - Interest payable on SDR allocations is recorded under other investment income. - Fees for nonmonetary gold loans included in interest under other investment income (see paragraph [11.12.68]). - Other investment income on equity excludes income on direct investment equity and portfolio investment in equity securities. - Equity participations that do not qualify as direct investment (below 10 percent) or as portfolio investment (not equity securities) are classified under other investment; any income distributed is classified in other investment income. - Some investment funds limited to a small number of members and not meeting direct or portfolio definitions: both distributed and reinvested earnings on such investment fund shares are classified under other investment income. - Income on equity in international organizations that is not tradable is classified under other investment income on equity. - Other investment income should be further classified by type of financial instruments and by domestic institutional sectors (for income receivable on holdings of external assets and income payable on external liability positions). - Table [11.12.3] / Table 12.3 provides a detailed breakdown of other investment income and associated financial instruments (expository; standard components in Appendix 9). ### Income on reserve assets - Income on reserve assets is useful for studying rates of return on reserves and for ensuring rates of return on other categories exclude reserves. - Investment income on reserve assets includes income on equity and investment fund shares, and interest. - Fees on security lending and monetary gold loans (paragraph [11.12.67]) and interest on unallocated gold accounts (paragraph [6.80]) are included under interest on reserve assets. - Income on equity and investment fund shares can be classified into dividends on equity securities and income attributable to investment fund shareholders (distributed and reinvested earnings). - Interest receivable can be further classified by type of financial instruments. - If not available for publication, income from reserve assets should be included in other investment–interest. - Interest on SDR holdings is shown on a gross basis under income on reserve assets; the value of interest payable on SDR allocations is not deducted (interest payable on SDR allocations is shown as income under other investment liabilities). --- _Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/bpm7-chapter-12-earned-income-account.pdf_