## d16-treatment-of-retained-earnings

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### SECTION I — Calculation of Reinvested Earnings (RIE) and Retained Earnings: core issues and practical constraints
- Definitions and conceptual basis:
  - DI income on equity includes all the distributed and undistributed current operating earnings of a DI company; undistributed earnings are imputed as reinvested earnings (RIE).
  - Retained earnings of a DIE are attributed as transactions of the direct investors as if retained earnings had been distributed in proportion to direct investors’ shares and then reinvested by them (BPM6, paragraph 3.18).
  - BPM6 paragraph 11.34: retained earnings show net earnings from production and primary and secondary income transactions before attributing reinvested earnings; alternatively Net Operating Surplus (NOS) plus primary income, current transfers receivable, and change in pension entitlements, minus primary income (excluding RIEs payable to the enterprise’s direct investors and owners of investment funds) and current transfers payable.
- NOS measurement guidance (BPM6 paragraph 11.44):
  - NOS should exclude realized and unrealized holding gains and losses from valuation changes, gains/losses from other changes in volume of assets (write-offs, write-downs, provisions).
  - R&D and own-account production of software treated as assets; certain capitalized items may need treatment as operating expenses.
- Practical constraints to calculate NOS and RIE:
  - Enterprise financial statements often lack complete, standardized information; national GAAP vs IFRS heterogeneity.
  - Resident DIEs: DI surveys provide more detail; foreign-controlled units are harder to obtain without distortion.
  - Commercial databases rarely provide required line-detail; some information appears only in financial statement notes.
  - Financial corporations: trading-based profits, valuation and provisioning practices create divergence between reported profits and statistical NOS; loan provisions and legal separation of provisions can produce large differences and revaluation flows.
- Empirical illustration:
  - ESCB-ESS TF FDI participants’ 2019–2021 exercise on six multinationals found reliable calculation of earnings generated down DI ownership chains usually infeasible for complex groups due to identification of real group structure, coverage of indirect domestic companies, and inconsistent income concepts in consolidated data.

### SECTION I — RIE treatment/classification in DI ownership chains: alternatives and implications
- BPM6 paragraph 11.47 principle:
  - “In a chain of direct investment relationships, reinvested earnings need only be recorded between the direct investor and directly owned direct investment enterprises. The passing of retained earnings from indirect holdings should be taken into account through the chain of direct investment relationships.”
- Practical recording implications:
  - If resident entity is at top of chain, RIE from indirectly held enterprises should be included in resident entity’s DI income (receivables).
  - If resident entity is in middle of chain, receivables of RIE should be allocated to the foreign direct investor in addition to payables of RIE of the resident entity.
  - SPEs and pass-throughs complicate imputations; entities in middle of chains often lack required information.
- Three alternatives for imputing indirect DI income:
  - Alternative A (Status quo): recognize all earnings generated down the DI ownership chain in primary income.
  - Alternative B: recognize all earnings as primary income but report indirect income separately as an “of which” to avoid impacting aggregates.
  - Alternative C: limit imputation of RIE to the P&L account of the immediate DIE.
- Empirical magnitude and potential impact:
  - Preliminary experimental estimates by US BEA indicate a 7 percent annual reduction in the current account balance if only income generated by the immediate entity is considered in DI income.
  - Indirect DI income may explain around €100bn in 2020 of (US – EU) DI income asymmetries; including similar estimates in EU figures would decrease the current account balance and GNI.

### SECTION I — Investment funds: retained earnings, operating fees, and three treatment options
- Institutional and measurement facts:
  - Investment funds legally and economically own the assets; shareholders are beneficial owners; fund managers provide asset management services but do not own fund assets.
  - Management Expense Ratio (MER) typically reported as an annual percentage of assets under management; MER excludes redemption/exchange/account fees (these are “shareholders fees” and part of fund output).
  - Investment fund output measured as sum of costs incurred by the fund; intermediate consumption excludes compensation of employees and non-production expenses.
  - BPM6 paragraph 11.38: undistributed earnings of investment funds are imputed as payable to owners and then reinvested; net savings of investment funds is always zero under current guidance.
- Ambiguities:
  - BPM6 lacks specific guidance on which items constitute operating expenses for fund RIE calculation (explicitly charged vs implicitly charged fees; taxes; service charges paid directly by investors).
- Three proposed options for recording indirectly charged operating fees:
  - Option 1: Record services as provided by original professional providers to the Fund, then from the Fund to the investor; Fund imputes property income to shareholders equal to operating charges so Fund operating expenses and revenues cancel.
  - Option 2: Do not impute service from fund to shareholders; income attributable to shareholders = investment income minus operating expenses. This yields negative value added for the fund.
  - Option 3: Consider day-to-day costs of the fund as services provided directly from original providers to shareholders; Fund’s operating expenses, output, and intermediate consumption would be zero; services are paid by fund on behalf of shareholders.
- Consequences across options:
  - Options 1 and 3 imply an imputed RIE-like component adding amounts corresponding to operating expenses to income attributable to shareholders.
  - Option 2 yields negative gross value added/operating surplus for the fund and contradicts BPM6 paragraph 10.125.

### SECTION I — Provisions for bad loans: proposed statistical treatment and implications
- Proposal summarized:
  - Deduct obligatory provisions for bad loans when calculating the RIE imputed to the direct investor, leaving those provisions as savings of the DIE.
- Statistical implications:
  - Would not change treatment of provisions as current expenses in macroeconomic statistics (2008 SNA, paragraph 7.139).
  - Would introduce DIE savings different from zero and increase the GNI of the DIE’s economy because part of earnings would remain as savings in that economy.
  - Would fail to recognize in the balance of payments and IIP the financing of provisions provided by the direct investor.
- Drafting team recommendation:
  - Present provisions as a memorandum item to avoid impacting GNI measurement while helping analysts interpret income figures, particularly during crises when provisions change banks’ P&L drastically.

### SECTION II — Outcomes, consensus, and recommendations
- RIE calculation and guidance:
  - DITT members agree BPM6 language should be improved to facilitate understanding of retained earnings and RIE and to remove inconsistencies with treating RIE as transactions (references: BPM6 paragraphs 3.4, 11.41, 11.34, 11.43).
  - All but one DITT member favored clarifying aspects of RIE compilation either in BPM or the BPM Compilation Guide, including examples, accounting mappings, and country experiences.
- Provisions treatment outcome:
  - Drafting team proposed reinterpreting provisions so provisions cannot be distributed and should remain as DIE savings, lowering RIE.
  - Most DITT members agreed provisions treatment could be reconsidered in revised BPM but noted need for further exploration with the AEG due to likely GNI impact.
  - Final recommendation: present provisions as a memorandum item rather than change GNI measurement.
- RIE along ownership chain outcome:
  - Majority view: conceptually retain attribution of all earnings below the DI ownership chain as RIE despite practical challenges.
  - About half of DITT members favored imputing only RIE from immediately held DIE for simplicity and to minimize asymmetry issues.
  - Recommendation: include more detailed guidance and practical experience in BPM7 Compilation Guide.
- Investment funds outcome:
  - Need for clarification on indirectly charged fees; three treatment options presented.
  - October 2021 Joint AEG/Committee meeting outcomes:
    - Agreed to revise retained earnings wording to: “Retained earnings of an enterprise show the net earnings from current production and primary and secondary income transactions that have not been distributed.”
    - Supported clarifying compilation of DI income and including RIE calculation examples in BPM Compilation Guide.
    - Agreed earnings generated down the DI ownership chain should remain part of RIE (Option A — status quo); no agreement on separate reporting of indirect income.
    - Broad support for always compiling RIE and net income; support for Option 1 treatment of indirectly charged operating expenses, acknowledging practical data challenges.
  - March–October 2022 consultations:
    - Majority rejected Option 2; views split between Option 1 and Option 3.
    - Written consultation: all members agreed direct fees paid by shareholders to third parties are not operating expenses/revenues of the Fund and are not included in RIE.
    - A slight majority supported Option 3 and favored creating a new imputed investment income component in addition to D4431 and D4432; a few members preferred changing D443 definition instead.

### Annex I illustrative numerical example of Options 1–3 for investment funds (preserve exact values)
- Assumptions:
  - Investment income generated by Investment Fund IFB = 15 units.
  - Operating expenses incurred by IFB = 5.
  - Resulting reinvested earnings = 10.
  - Service provider is resident in Country C; all shareholders are in Country A.
  - IFB has not distributed any dividend to investors A.
- Recordings by option (summary of principal entries):
  - Option 1 (Gross approach):
    - Shareholders: Investment income attributable = 15; Dividends (imputed) = 5; Reinvested earnings = 10.
    - Investment Fund: Investment income = 15; Dividends (imputed) = 5; Reinvested earnings = 10; Output = 5; Intermediate consumption = 5; Gross value added = 0.
  - Option 2 (Net approach):
    - Shareholders: Investment income attributable = 10; Dividends (imputed) = 0; Reinvested earnings = 10.
    - Investment Fund: Investment income recorded = 15; Investment income attributable to shareholders = 10; Reinvested earnings = 10; Gross value added / operating surplus = -5 (negative).
    - This is inconsistent with BPM6 paragraph 10.125.
  - Option 3:
    - Shareholders: Investment income attributable = 15; Dividends (imputed) = 5; Reinvested earnings = 10.
    - Investment Fund: Investment income = 15; Dividends (imputed) = 5; Reinvested earnings = 10; Investment fund has no output and no intermediate consumption in SNA example.
    - Fund Managers: Output 5; financial account entries reflect deposits 5.
- Key implication:
  - Options 1 and 3 avoid negative value added for the fund by imputing services or imputing fund output; Option 2 produces negative gross value added and was widely rejected.

### Annex III — Indirect RIE calculation examples and impacts on GNI (exact figures preserved)
- Group structure example: A → B → C → D; each resident in different economies.
- Baseline NOS and distribution (values preserved):
  - Total NOS = 110.
  - Company-level numbers:
    - A: NOS 0; Dividends Receivable 30; Enterprise’s Share of RIE of any DIEs 80.
    - B: NOS 10; Dividends Receivable 60; Enterprise’s Share of RIE of any DIEs 40; Dividends Payable 30; Non-Distributed 80.
    - C: NOS 80; Dividends Receivable 15; Enterprise’s Share of RIE of any DIEs 5; Dividends Payable 60; Non-Distributed 40.
    - D: NOS 20; Dividends Payable 15; Non-Distributed 5.
- Example outcomes by methodological choice (selected exact results):
  - Example 1 (BPM6 along-chain imputations; Option A):
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 125; RIE Payable 125; Total Income Credits 230; Total Income Debits 230; Net 0.
    - Company nets used to estimate GNI: A 110; B -10; C -80; D -20.
  - Example 1a (Option B — report indirect income separately): net impact on GNI unchanged versus Example 1; A: Total Income Net 110; B: -10.
  - Example 2 (Immediate Counterpart — Option C):
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 80; RIE Payable 80; Total Income Credits 185; Total Income Debits 185; Net 0.
    - Company nets and GNI impacts: A Total Income Net 70 (Impact on GNI 40); B Net 25 (Impact on GNI 35); C Net 75 (Impact on GNI -75); D Net -20.
    - Observation: Method can significantly overstate or understate GNI depending on chain length, position along chain, and relative inward/outward DI.
  - Example 3 (Only head implements BPM6 imputations):
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 120; RIE Payable 80; Total Income Credits 225; Total Income Debits 185; Net 40.
    - Implication: mixed reporting creates asymmetries and impacts GNI for most economies except parent economy.
  - Example 4 (Mixed approach yields totals balancing to Net 0 but shows bilateral asymmetries).
- Compiler guidance implications:
  - Collecting full along-the-chain information is data-intensive and often infeasible.
  - Immediate Counterpart (Option C) minimizes compilation burden but may distort GNI for economies positioned mid-chain or at top.
  - Reporting indirect RIE separately (Option B) preserves attribution while leaving GNI unchanged under current methodology and assists transparency.

- Key recommendations and next steps (numeric and definitional actions):
  - Update BPM6 and the 2008 SNA to:
    - Specify institutional separation of funds and managers.
    - Define operating expenses/revenues for collective investment schemes and record operating costs when indirectly charged to shareholders.
    - Clarify treatment of indirect fees, including whether to change the definition of RIE or introduce an imputed dividend/imputed investment income component.
    - Define investment fund output and imputed transactions in the SNA.
    - Maintain that direct fees paid by shareholders to third parties are not operating expenses/revenues of the fund and are excluded from RIE.
  - Add an imputed investment income component to D4431/D4432 if Option 1 or Option 3 is adopted; alternatively consider changing the definition of D443.

*International Monetary Fund, d16-treatment-of-retained-earnings*

### SECTION I: THE ISSUES

### SECTION I: THE ISSUES

### Background — Issue 1: Calculation of Reinvestment of Earnings (RIE)
- Direct Investment (DI) income on equity includes all the distributed and undistributed current operating earnings of a DI company. Distributed earnings consist of dividends or withdrawals from income of quasi corporations, while undistributed earnings are imputed as reinvested earnings.
- Retained earnings of direct investment enterprises (DIE) are attributed as transactions of the direct investors as if the retained earnings had been distributed in proportion to direct investors’ shares in the earnings of the DIE and then reinvested by them (BPM6, paragraph 3.18).
- BPM6 paragraph 11.34 indicates that the retained earnings of an enterprise show:
  - the net earnings from production and primary and secondary income transactions before attributing reinvested earnings, or
  - Net Operating Surplus (NOS) plus primary income, current transfers receivable, and change in pension entitlements, and minus primary income (excluding RIEs payable to the enterprise’s direct investors and owners of investment funds) and current transfers payable.
- BPM6 paragraph 11.44 guidance: NOS should exclude items not part of the production process and include those that are. Examples of non-standardized or excluded items: realized and unrealized holding gains and losses derived from valuation changes (revaluation of fixed assets, changes in market prices of financial assets and liabilities, exchange rate changes), gains or losses due to other changes in volume of assets (write-offs, write-downs, provisions). R&D and own-account production of software should be treated as assets and not as expenses. Certain capitalized items may need to be treated as operating expenses.
- Practical constraints to operationalize NOS and RIE calculation:
  - Enterprise financial statements often lack the complete, detailed information needed; formats are non-standardized across enterprises.
  - Most companies follow national GAAP; a smaller number follow IFRS.
  - Detailed information is more accessible for resident DIEs via DI surveys; obtaining similar detail from foreign-controlled units can distort calculations.
  - Commercial databases of listed and unlisted enterprises usually do not provide required details; some information may appear only in notes to financial statements.
  - These constraints are material given the Committee’s agreement to add supplementary information on portfolio investment RIE (Committee and AEG involvement noted).
- Financial corporations pose particular measurement difficulties:
  - Activities and profits are based on financial trading; holding gains beyond normal trading margins may be included in financial accounting and reported profits may differ from statistical recording.
  - Loan provisions and legal separation of provisions can create large differences between reported profits and statisticalNOS; differences may appear as revaluation flows.
  - Figure 1 illustrates relevance of provisions in Euro Area credit institutions (profit and loss already discounts net provisions; COPC calculation requires adding net provisions back to P&L values).

### Background — Issue 2: RIE Treatment/Classification in the DI Ownership Chain
- BPM6 paragraph 11.47: “In a chain of direct investment relationships, reinvested earnings need only be recorded between the direct investor and directly owned direct investment enterprises. The passing of retained earnings from indirect holdings should be taken into account through the chain of direct investment relationships.” Retained earnings of an enterprise in the chain include reinvested earnings derived from its immediate subsidiaries, which as direct investors would receive reinvested earnings from their immediate subsidiaries, and so on.
- SNA 2008 paragraph 26.63: “Retained earnings are equal to the net operating surplus of the enterprise plus all property income earned less all property income payable (before calculating reinvested earnings) plus current transfers receivable less current transfers payable and less the item for the adjustment for the change in pension entitlements. Reinvested earnings accrued from any immediate subsidiaries are included in the property income receivable by the direct investment enterprise”.
- Recording RIE from indirectly held enterprises:
  - If the resident entity is at the top of the investment chain, RIE from indirectly held enterprises should be included in the resident entity’s DI income (receivables).
  - If the resident entity is in the middle of the investment chain, receivables of RIE should be allocated to the foreign direct investor in addition to the payables of RIE of the resident entity.
- Special Purpose Entities (SPEs) and pass-through entities complicate indirect RIE calculation; resident entities may also generate income and therefore should not automatically record debits equal to credits.
- Long ownership chains hinder distinction between operational (COPC) and non-operational earnings:
  - DI income is usually requested from the immediate DIE; when multiple layers contribute to total income, measuring COPC and non-COPC for each enterprise is harder.
  - Entities in the middle of chains often lack required information; compiling is burdensome and time-consuming and requires high expertise.
  - Accounting consolidation methods chosen by the top company may not provide line-by-line revenues and expenses needed for COPC alignment.
- Empirical testing and country experiences:
  - ESCB-ESS TF FDI participants (National Bank of Belgium, Banco de España, Banque de France, Bundesbank, Office for National Statistics (UK)) ran a 2019–2021 exercise on six multinationals. Outcomes: reliable calculation of earnings generated down DI ownership chains is usually infeasible for complex groups due to:
    - difficulty identifying real group structure and ownership shares;
    - difficulty identifying and covering domestic companies indirectly held by direct investors (DI surveys often focus on immediate foreign counterpart);
    - different and inconsistent income concepts depending on granularity available to compute COPC, particularly in consolidated group data.
  - Including indirect income estimates increased cross-country differences and reduced reliability.
  - The US Bureau of Economic Analysis (BEA) collects sufficient information to estimate and publish DI income through ownership chains; a change in standards would have a large impact on current account balance and Gross National Income (GNI) figures.

### Background — Issue 3: Investment Income Attributable to Investment Fund Shareholders — Retained Earnings
- Investment funds are collective investment schemes (CIS) that raise funds by issuing shares or units to the public; as legal and institutional units, investment funds legally and economically own the financial assets in which the funds invest; shareholders of the investment fund are the beneficial owners of the assets.
- Fund managers provide asset management services but do not own the assets or assume liabilities of the fund; fund managers are separate institutional units.
- Investment funds typically engage administrators, trustees and/or portfolio managers and pay fees to service providers; funds charge investors a service fee equivalent to operating expenses, usually reported as an annual percentage of assets under management—referred to as the management expense ratio (MER).
- The MER excludes redemption fees, exchange fees for transferring shares/units within the same fund group, and account fees. These transaction-specific fees are part of “shareholders fees” charged by the fund and thus part of the output of the investment fund. Front-end/back-end load fees and additional entry/exit charges are charged to shareholders and considered fees explicitly charged to shareholders.
- The investment fund’s output is measured as the sum of costs incurred by the fund. Intermediate consumption (IC) is operating expenses to operate the fund excluding compensation of employees and expenses not associated with production (donations, provisions for loan losses, etc.). NOS and retained earnings are derived similarly to other corporations in the 2008 SNA.
- BPM6 paragraph 10.124–10.125: expenses can be explicitly charged to investors as a fee or implicitly paid out of investment income received or out of the assets of the fund. If expenses are implicitly paid, BPM6 states it should be recognized as a service to the owners; it is unclear whether an imputed service should be included in the balance of payments between the fund and the shareholder in cross-border relations.
- BPM6 paragraph 11.38: undistributed earnings of investment funds are imputed as payable to the owners and then reinvested into the fund. This applies to both DI and portfolio investment. Consequence: net savings of investment funds is always zero; net earnings of investment funds (investment income less operating expenses) ultimately belong to shareholders and are either distributed as dividends or reinvested.
- Ambiguities and operational questions:
  - Treatment and calculation of investment funds’ RIE follow the same principles as for other DIEs, but BPM6 lacks specific guidance on what should be considered operating expenses when calculating investment fund RIE.
  - Unclear whether implicitly or indirectly charged operating expenses, payment of taxes, or service charges paid directly by investors to fund managers should be included or excluded when calculating RIE.
  - In 2018, the ESCB initiated discussions to compile investment fund income attributable to shareholders on a security-by-security (SBS) basis; an overview of the resulting compilation model is in Annex II.
- Committee actions and related notes:
  - In June 2021, the Committee discussed and agreed (GN F.2 Asymmetric Treatment of Retained Earnings) to retain the current treatment of DI RIE. The recording of RIE in portfolio investment and domestically will be considered as part of testing of F.2.
  - In October 2020, the Committee discussed and agreed (GN D.3 Collective Investment Institutions (CIIs)) to modify the operational definition of DI to exclude certain investments in or by CIIs to overcome conceptual and practical issues from existing guidelines.
- Measurement implications for credit institutions:
  - Income concepts do not deduct expenses related to provisions for losses on long-term contracts as these are not considered intermediate consumption (IC). For credit institutions, such provisions are often large and mandatory from regulators and materially affect profitability.
  - Analytical use of RIE and stock/flow reconciliation for credit institutions is hampered: DI income overstatements are often corrected by negative price revaluations, producing significant and persistent differences with financial accounting profitability of the sector.

### Issues for Discussion — Issue 1: Calculation of RIE
- BPM6 references on retained earnings and RIE:
  - Reinvestment of Earnings (paragraph 8.15): “It is the corresponding entry and equal to reinvested earnings”.
  - Retained Earnings (paragraph 11.34): “Retained earnings of an enterprise shows the net earnings from production and primary and secondary income transactions before attributing reinvested earnings”.
  - Reinvested Earnings (paragraph 11.40): “The reinvested earnings are the direct investors’ share of the retained earnings of the direct investment enterprise”.
- Proposal to clarify retained earnings definition:
  - Suggested modification: “Retained earnings of an enterprise shows the net earnings from current production and primary and secondary income transaction that has not been distributed”, removing the reference to reinvested earnings.
  - Once retained earnings are calculated, reinvested earnings are the part of the retained earnings owned by the direct investor based on the percentage of ownership.
- Further clarifications needed in BPM6 update or compilation guide:
  - Change in pension entitlements is mentioned in paragraph 11.34 but not consistently included elsewhere in BPM6 discussions of RIE.
  - Values of “Enterprise’s share of RIE of any DIEs” are not included in standard profit and loss statements of enterprises.
- Specific treatment issue for provisions:
  - Income generated by enterprises does not deduct expenses related to provisions for losses on long-term contracts as these are not considered IC of the sector.
  - For credit institutions, these provisioning expenses are large and often mandatory, significantly impacting profitability.
  - The statistical treatment leads to overstatement of DI income that is typically corrected by negative price revaluations, complicating analytical use of RIE and stock/flow reconciliation for credit institutions.

*Prepared by Carmen Picón Aguilar and Antonio Rodríguez Caloca (European Central Bank, ECB), Emma Angulo, Francien Berry, and Emmanuel Manolikakis (International Monetary Fund, IMF), Fernando Lemos (Banco Central do Brasil), Irene Madsen, and Matthias Ludwig (Eurostat).*

### 22. To reflect that obligatory provisions for bad loans cannot potentially be distributed to the

### d16-treatment-of-retained-earnings - 22. To reflect that obligatory provisions for bad loans cannot potentially be distributed to the

### Provisions for bad loans and impact on RIE and GNI
- Proposal: Deduct obligatory provisions for bad loans when calculating the reinvested earnings (RIE) to be imputed to the direct investor (DIE), leaving those provisions as savings of the DIE.
- Statistical implications:
  - Would not change the treatment of provisions in macroeconomic statistics as current expenses (reference to 2008 SNA, paragraph 7.139).
  - Would introduce the novelty that DIE may have savings different from zero.
  - Would increase the GNI of the DIE’s economy because part of the DIE’s earnings would remain as savings of that economy.
  - Would fail to recognize in the balance of payments and international investment position (IIP) the financing of provisions provided by the direct investor.
- Alternative recommended by drafting team:
  - Present provisions as a memorandum item to avoid impacting the measurement of GNI of the DIE’s economy.
  - Benefits of memorandum presentation:
    - Helps analysts interpret statistical income figures, particularly in financial crises when provisions may drastically change banks’ P&L.
    - Isolation of regulatory provisions should not generate additional reporting burden and would be more consistent with financial accounting.

### RIE treatment/classification along the DI ownership chain
- Problem statement:
  - BPM6 guidance is unclear on including RIE derived from an immediate DIE (BPM6, paragraph 11.47); values of RIE receivables from the immediate DIE are not included in its P&L.
  - Different practical interpretations exist; clarification and examples are needed in the updated manual.
- Practical and analytical consequences:
  - Incorrectly recorded DI income affects levels and partner-economy allocation of income statistics and can create global and bilateral asymmetries; relevant for economic union aggregates.
  - Recording indirect DI income across the whole ownership chain implies imputing retained earnings between corporations with domestic equity links (see relation to GN F.2 and GN D.17).
- Three alternatives considered for imputing indirect DI income:
  - Alternative A: Status quo — recognize all earnings generated down the DI ownership chain in primary income (conceptually and analytically sound, example 1 in Annex III).
  - Alternative B: Recognize all earnings as primary income but report indirect income separately as an “of which” to avoid impacting aggregates (example 1a in Annex III). Transparent and comparable but difficult for consolidated-data countries.
  - Alternative C: Limit imputation of RIE to the P&L account of the immediate DIE (example 2 in Annex III). Simpler and may reduce asymmetries but could change RIE measurement, current account balance, and GNI for some countries.
- Drafting team positions:
  - Some favored including imputation of RIE generated through the DI ownership chain separated as an “of which” in reported data to improve global comparability.
  - Others preferred the simplification of Alternative C.
- Empirical indication:
  - Preliminary experimental estimates by US BEA indicate a 7 percent annual reduction in the current account balance if only income generated by the immediate entity is considered in DI income.
  - Indirect DI income may explain part of current (US – EU) asymmetries in DI income (around €100bn in 2020); including similar estimates in EU figures would decrease the current account balance and consequently GNI, though the amount is difficult to estimate.

### Investment fund shareholders’ retained earnings and treatment of operating fees
- Scope:
  - Retained earnings generated by investment funds should always be compiled regardless of type, assets, dividend policy, liquidity, or law/statute of constitution.
- Definition and measurement:
  - Income attributable to shareholders is calculated first; retained earnings = residual not distributed as dividends to collective investment fund shareholders (D443).
  - Reinvested earnings may be negative.
  - Following BPM6 paragraph 11.38, retained earnings = investment income earned by the fund’s investment portfolio after deducting operating expenses minus dividends distributed by the fund.
  - Investment income timing:
    - Accrual basis for interest on debt instruments and rents (BPM6, paragraphs 11.49 and 11.89).
    - Ex-dividend date for equity-related income (BPM6, paragraph 11.31).
  - Operating expenses include investment management charges; costs of executing sales/purchases and maintaining accounts; administrative, marketing, distribution, legal, accounting, custodian, central administration, distribution and audit fees.
- Fees classification (summary from Table 1):
  - Direct fees: Paid directly by shareholder to fund manager or service provider. Not operating expenses of the IF; treated as consumption of shareholders.
  - Indirect fees: Paid by the investment fund to third parties out of investment income or assets. Treated as operating expenses of the IF; treatment to be decided.
- Three options proposed for recording indirect fees:
  - Option 1: Record services as provided by original professional providers to the Fund, then from the Fund to the investor. Requires imputations: the Fund would impute property income to shareholders by amount of operating charges to avoid net errors and omissions; total income attributable to shareholders equals net investment earnings; Fund’s operating expenses and revenues cancel.
  - Option 2: Do not impute service from fund to shareholders; income attributable to shareholders = investment income minus operating expenses. From NA perspective (and current BPM6 wording), this yields a negative value added for the investment fund.
  - Option 3: Consider all day-to-day costs of the fund as services provided directly from original providers to shareholders. Fund’s operating expenses, output, and intermediate consumption would be zero; all net income generated by the fund excluding taxes attributed to shareholders; services paid by the fund on behalf of shareholders.
- Consequences and further considerations:
  - In Options 1 and 3, total income attributable to shareholders would include an imputed amount corresponding to operating expenses that is not explicitly distributed or reinvested — an imputed RIE-like component.
  - Possibility to redefine RIE to cover operating revenues or to introduce a new income component in addition to D4431 (dividends) and D4432 (RIE).
  - Investment fund income attributable to shareholders is measured after deducting corporate taxes charged on the income of the enterprise (BPM6, paragraph 11.45); these are not the same as withholding taxes paid by the fund on behalf of shareholders.
  - Residency identification of management company, investment fund, and shareholders is necessary to correctly allocate exports/imports of services; industry-provided estimation guidelines could assist compilers.

### SECTION II: Outcomes and consensus
- RIE calculation and guidance:
  - DITT members agree BPM6 language should be improved to facilitate understanding of RIE and retained earnings and to remove inconsistencies with treating RIE as transactions (references: BPM6 paragraphs 3.4, 11.41, 11.34, 11.43).
  - All DITT members but one favored clarifying aspects of RIE compilation either in BPM or the BPM Compilation Guide; the Guide could include examples, accounting mappings, and country experiences.
- Provisions treatment outcome:
  - Drafting team proposed reinterpreting provisions (especially regulatory provisions for bad loans) in DI income: provisions cannot be potentially distributed and should remain as savings of the DIE, lowering RIE.
  - Income components of DIE would then be: dividends (distributed), RIE, and savings equal to new provisions.
  - Most DITT members agreed the provisions treatment could be reconsidered in the revised BPM but noted the issue needs more exploration with the AEG because of likely GNI impact.
  - Cost/benefit concerns: some members noted amounts may be insignificant for some economies.
  - Final recommendation: present provisions as a memorandum item to facilitate analysis without changing GNI measurement.
- RIE along ownership chain outcome:
  - Conflicting views remain on imputing RIE from all subsidiaries vs only immediate-held DIE.
  - Majority view: conceptually keep attribution of all earnings below the DI ownership chain as RIE despite practical estimation challenges.
  - About half of DITT members favored imputing only RIE from the immediately held DIE for simplicity and minimizing asymmetry issues.
  - Recommendation to include more detailed guidance and practical experience in the BPM7 Compilation Guide.
- Investment funds outcome:
  - Need for clarification on treating indirectly charged fees (operating expenses) borne by shareholders.
  - Three treatment options presented and their implications for fund value added, RIE measurement, and possible introduction of a new income component.

*International Monetary Fund, d16-treatment-of-retained-earnings*

### 46. The recording of the indirect fees charged by the Fund to the investors lacks clarity in the

### d16-treatment-of-retained-earnings - 46. The recording of the indirect fees charged by the Fund to the investors lacks clarity in the

### Summary of problem and proposed approaches
- The Guidance Note (GN) identifies a lack of clarity in BPM6 and the 2008 SNA about how operating expenses of investment funds are allocated to shareholders when charges are indirect.
- Three alternative proposals for recording indirectly charged operating expenses are presented (paragraph 46):
  - Option 1: Recognize the expenses incurred by the investment fund as a service provided by the fund to the owners; the counterpart entry is a reduction in the value of the investment. Investment income attributable to shareholders is recorded “gross” (i.e., not reduced by operating expenses). (Tables 1 and 1A in Annex 1)
  - Option 2: Record the expenses incurred by the investment fund as deducted from the attributable income imputed to the shareholder; investment income attributable to investors is calculated in “net” terms. (Tables 2 and 2A in Annex 1)
  - Option 3: Treat the investment fund as having no output or operating expense by definition; calculate investment income attributable to shareholders as “gross” and impute that the Fund (or third parties on behalf of the shareholder) is paid via a reduction in the investment’s value. (Tables 3 and 3A in Annex 1)

### Implications for measurement and accounts
- Calculating income attributable to shareholders in gross terms (i.e., not deducting operating costs) would require either:
  - Redefinition of RIE (reinvested earnings on direct investment), or
  - Inclusion of a new imputed income component.
- Depending on the chosen approach, updates to BPM6 and the 2008 SNA should:
  - Clearly state that the investment fund is a separate institutional unit from the fund manager.
  - Include a clear definition of operating expenses (and revenues) for collective investment schemes:
    - a. Operating expenses of an investment fund are costs necessarily incurred by the fund in its day-to-day operation (See paragraph 31).
    - b. Operating costs of an investment fund are recorded when those costs are indirectly (specifically or generally) charged by the IF to the shareholder.
  - Clarify implications for recording “indirect fees,” including change in definition of RIE or introduction of a new income component “imputed dividends.”
  - Define the output of the investment fund and imputed transactions in the SNA.
  - Clarify that “direct fees” are not operating expenses/revenues of the Fund and are not included in the calculation of RIE.

### Outcomes of DITT, AEG and Committee deliberations
- DITT members:
  - Agreed that RIE and net income should always be compiled regardless of fund attributes.
  - Largely supported the GN’s methodological approaches while noting practical challenges due to data unavailability on indirectly charged fees.
- October 2021 Joint AEG/Committee meeting:
  - Members unanimously agreed retained earnings and reinvested earnings descriptions in BPM6 should be revised to: “Retained earnings of an enterprise show the net earnings from current production and primary and secondary income transactions that have not been distributed.”
  - Members supported clarifying compilation of direct investment income and including examples on calculation of RIE in the updated BPM Compilation Guide.
  - Members agreed earnings generated down the DI ownership chain should remain part of RIE (Option A – status quo); there was no agreement on reporting indirect income separately.
  - Broad support for always compiling RIE and net income; support for Option 1 treatment of indirectly charged operating expenses, with recognition of practical concerns and implications for considering investment funds as producing units.
  - Committee and AEG requested extension of the GN to cover national accounts (NA) implications; GN to be updated in consultation with IMF’s Real Sector Division and circulated for final approval.
- March 2022 and subsequent written consultation:
  - October 2022 Committee and AEG meeting focused on Issue 3 (indirect fees). Majority rejected Option 2 (net approach), because it would: 
    - Lead to negative value added for the asset management enterprise, and
    - Produce a calculation of income attributable to shareholders equal to investment income generated by the fund minus operating expenses.
  - Views split between Option 1 and Option 3.
  - Written consultation results:
    - All members agreed “direct fees” paid by shareholders to third parties (e.g., fund manager) are not operating expenses/revenues of the Fund and are not included in RIE.
    - A slight majority of members supported Option 3.
    - With support for Option 3, majority favored creating a new imputed income component so total income attributable to shareholders would include amounts corresponding to operating expenses that are not explicitly distributed or reinvested.
    - As a result, an imputed investment income component needs to be added to existing D4431 (dividends) and D4432 (RIE). A few members preferred changing the definition of D443 instead, for pragmatic reasons.

### Illustrative numerical example (Annex I) and treatment differences
- Assumptions used to illustrate Options 1–3:
  - Investment income generated by Investment Fund IFB = 15 units of income (cash) for the period.
  - Operating expenses incurred by IFB during the period = 5.
  - Resulting reinvested earnings = 10.
  - Service provider (financial auxiliary) is resident in Country C (S126 C); all shareholders are in Country A.
  - IFB has not distributed any dividend to investors A.
- How each option records the 15 / 5 / 10 amounts:
  - Option 1 (Gross approach):
    - Shareholders: Investment income attributable = 15; Dividends (imputed) = 5; Reinvested earnings = 10.
    - Investment Fund: Investment income = 15; Dividends (imputed) = 5; Reinvested earnings = 10; Output = 5; Intermediate consumption = 5; Gross value added / operating surplus = 0 (SNA Table 1A shows Output 5, Intermediate Consumption 5, Gross value added 0).
    - Fund Managers: Current account financial services = 5; deposits = 5.
  - Option 2 (Net approach):
    - Shareholders: Investment income attributable = 10; Dividends (imputed) = 0; Reinvested earnings = 10.
    - Investment Fund: Investment income recorded = 15; Investment income attributable to shareholders = 10; Reinvested earnings = 10; Gross value added / operating surplus = -5 (SNA Table 2A shows Output 0, Intermediate Consumption 5, Gross value added / operating surplus -5).
    - Fund Managers: Current account financial services = 5; deposits = 5.
    - This approach yields negative operating surplus for the fund and is inconsistent with paragraph 10.125 of BPM6.
  - Option 3:
    - Shareholders: Investment income attributable = 15; Dividends (imputed) = 5; Reinvested earnings = 10.
    - Investment Fund: Investment income = 15; Dividends (imputed) = 5; Reinvested earnings = 10; Investment fund has no output and no intermediate consumption in the SNA example.
    - Fund Managers: Output 5; financial account entries reflect deposits 5.
    - Option 3 avoids negative value added for IFB by imputing the services provided by fund managers directly to shareholders (through the management company).

### Key recommendations and next steps
- Update BPM6 and the 2008 SNA to:
  - Specify institutional separation of funds and managers.
  - Define operating expenses/revenues for collective investment schemes and record operating costs when indirectly charged to shareholders.
  - Clarify treatment of indirect fees, including whether to change the definition of RIE or introduce an imputed dividend/imputed investment income component.
  - Define investment fund output and imputed transactions in the SNA.
  - Maintain that direct fees paid by shareholders to third parties are not operating expenses/revenues of the fund and are excluded from RIE.
- Add an imputed investment income component to D4431/D4432 if Option 1 or Option 3 is adopted; alternatively, consider changing the definition of D443 for pragmatic consolidation (some members favored the latter).

*Source: Guidance Note discussed by the IMF's DITT, Joint AEG/Committee meetings (October 2021, March 2022, October 2022) and subsequent written consultation.*

### Annex II. The Compilation of Investment Funds’ Income Attributable to Shareholders on a

### Annex II. The Compilation of Investment Funds’ Income Attributable to Shareholders on a Security-by-Security Basis: the ESCB Experience

### ESCB initiative and objectives
- In 2018, the ESCB Working Group External Statistics (WG ES) and Working Group Securities (WG SEC) initiated discussions on the technical implementation in the ESCB’s Centralised Securities Database (CSDB) of income information directly provided by some National Central Banks (NCBs), on a security-by-security (SBS) basis (referred to as “SBS income data”).
- The initiative followed:
  - an agreement on the methodological treatment of investment funds’ income,
  - substantial enhancements of the CSDB data for investment funds.
- Objective: enhance the CSDB and national practices to compile investment funds income attributable to shareholders (“IFs’ income”) in line with BPM6 methodology.

### Timeliness and data reconciliation challenges
- The WG ES suggested approach uses CSDB output files that are data snapshots at end-month reference date and requires reconciliation of:
  - CSDB output file reference dates,
  - SBS income data directly reported by NCBs to the CSDB system,
  - quarterly balance of payments data transmission deadlines to the ECB and Eurostat.
- Timeliness issues observed:
  - Example for compilation of 2019-Q4 quarterly BOP data (transmitted on March 20, 2020):
    - CSDB output files with December 2019 data were produced first in January 2020 and then revised in February 2020.
    - SBS income data were only made available on March 10, 2020, in the “February-2020 extract”.
    - For countries providing monthly SBS income data with a two-month delay (e.g., Luxembourg), December 2019 SBS income arrived only in the March-10-2020 extract.
    - For other countries (quarterly data or longer reporting lags), data for reference December 2019 were available in the CSDB output files later in the year.
- Luxembourg example: Luxembourgish and Irish funds’ market capitalization jointly represented around 90 percent of the funds cross-border traded within the euro area at the end of 2020. Luxembourg typically provides monthly SBS income data with a two-month time lag.

### WG ES compilation model: merging extracts and decision tree
- The compilation model merges all available CSDB output extracts into a single dataset and follows a decision tree:
  - If a specific fund has available SBS income data (NCB-submitted), use it.
  - If not, estimate using the CSDB “Accrued Income Factor” (AIF) attribute.
- AIF attribute:
  - Estimates the daily rate of income generated for each fund.
  - Based on available SBS income data for funds with similar characteristics (same fund type or asset structure).
  - For funds with SBS income, the corresponding AIF is also available.
- Frequency handling and seasonality:
  - IFs’ income frequency varies from weekly to annual.
  - Frequency information is either directly reported by NCBs (for funds with SBS income) or derived by the CSDB system (for funds with only AIF).
  - For IFs’ income estimates based exclusively on the AIF, a seasonality ratio is considered based on information provided for funds with SBS income, clustered by fund type.

### Performance and benefits of the ESCB WG ES approach
- IFs’ income estimates using the ESCB WG ES compilation provide robust results:
  - In line with those submitted to the ECB and Eurostat by EU countries already following a SBS compilation approach.
  - Substantially improve results relative to cases where a macro statistics estimation model is in place.
- Main benefit for countries with SBS compilation: use of income frequency information and the “enhanced” (seasonality-considering) AIF information.

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### Annex III. Calculating Indirect RIE: Recording RIE Along an Ownership Chain — Examples and Implications

### Example group structure and baseline numbers
- Company group: A (head) → holds 100 percent equity of B; B fully owns C; C fully owns D. Each company is resident in a different economy.
- Available information generally limited to balance sheet of immediate subsidiary; A may have full group information.
- Under current standards, A should include as DI income the total NOS generated by the group (110) broken down by dividends (30) and RIE (80) and attribute it to affiliate B even though not generated by B.
- Table of DI income generated by each company in the group (values preserved exactly):
  - A: NOS 0; Dividends Receivable 30; Enterprise’s Share of RIE of any DIEs 80; Dividends Payable - ; Non-Distributed - ; (Total row context: A - 30 80 - -)
  - B: NOS 10; Dividends Receivable 60; Enterprise’s Share of RIE of any DIEs 40; Dividends Payable 30; Non-Distributed 80
  - C: NOS 80; Dividends Receivable 15; Enterprise’s Share of RIE of any DIEs 5; Dividends Payable 60; Non-Distributed 40
  - D: NOS 20; Dividends Receivable - ; Enterprise’s Share of RIE of any DIEs - ; Dividends Payable 15; Non-Distributed 5
  - Total NOS = 110
- Note: shaded cells in the original indicate which information is available for any immediate DIE; compilers may lack RIE information for subsidiaries deeper in the chain.

### Data availability implications and proxying
- Example: B, having only C’s balance sheet, may record Enterprise’s share of RIE of C as 35 instead of 40 if D’s RIE imputation is missing; RIE payable to A would also be 35.
- If accounting standards require valuation at market value or approximation, retained earnings of D may be reflected in revaluation accounts of C and thus provide a proxy (not COPC but potentially a good all-inclusive proxy).

### Methodological options and example outcomes (preserve numeric results)
- Example 1 (BPM6 Recording; Option A — perfect BPM6 recording):
  - A: Dividends Received 30; Dividends Paid ; RIE Receivable 80; RIE Payable 0; Total Income Credits 110; Total Income Debits 0; Total Income Net 110; used to estimate GNI 110
  - B: Dividends Received 60; Dividends Paid 30; RIE Receivable 40; RIE Payable 80; Total Income Credits 100; Total Income Debits 110; Total Income Net -10; used to estimate GNI -10
  - C: Dividends Received 15; Dividends Paid 60; RIE Receivable 5; RIE Payable 40; Total Income Credits 20; Total Income Debits 100; Total Income Net -80; used to estimate GNI -80
  - D: Dividends Received ; Dividends Paid 15; RIE Receivable ; RIE Payable 5; Total Income Credits 0; Total Income Debits 20; Total Income Net -20; used to estimate GNI -20
  - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 125; RIE Payable 125; Total Income Credits 230; Total Income Debits 230; Net 0
- Example 1a (Option B — keep attribution as RIE but report indirect income separately):
  - A: RIE Receivable 80 of which indirect 40; Total Income Credits 110; Total Income Debits 0; Total Income Net 110
  - B: RIE Receivable 40 of which indirect 5; RIE Payable 80 of which indirect 40; Total Income Credits 100; Total Income Debits 110; Total Income Net -10
  - C and D present analogous allocations; net impact on GNI remains unchanged under current methodology.
- Example 2 (Immediate Counterpart — Option C):
  - Only imputations related to the immediate DIE are recorded; this is probably the most usual compilation and minimizes asymmetries in compilation effort.
  - Example outcomes:
    - A: Total Income Credits 70; Total Income Debits 0; Total Income Net 70; Impact on GNI 40
    - B: Total Income Credits 95; Total Income Debits 70; Total Income Net 25; Impact on GNI 35
    - C: Total Income Credits 95; Total Income Debits 20; Total Income Net 75; Impact on GNI -75
    - D: Total Income Credits 0; Total Income Debits 20; Total Income Net -20
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 80; RIE Payable 80; Total Income Credits 185; Total Income Debits 185; Net 0
  - Observation: Method can significantly overstate or understate GNI depending on:
    - (i) length of DI chain;
    - (ii) position of the economy along the chain;
    - (iii) relative levels of inward and outward DI.
  - Consequence: economies in middle of chain that are disproportionate DI recipients may have grossly overstated GNI; economies at top of chain may have understated GNI.
- Example 3 (Only head of company implements BPM6 imputations):
  - A records full along-the-chain imputations; other countries record only immediate DIE imputations.
  - Example outcomes:
    - A: Total Income Credits 110; Debits 0; Net 110
    - B: Total Income Credits 95; Debits 70; Net 25
    - C: Total Income Credits 95; Debits 20; Net 75 (reported as -75 in the along-chain method context)
    - D: Total Income Credits 0; Debits 20; Net -20
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 120; RIE Payable 80; Total Income Credits 225; Total Income Debits 185; Net 40
  - Implication: mixed reporting drives asymmetries and impacts GNI for most economies except the parent economy.
- Example 4 (Mixed approach: head of company records along-chain imputations; others impute immediate subsidiary RIE to immediate parent):
  - Example outcomes:
    - A: Total Income Credits 110; Debits 0; Net 110
    - B: Total Income Credits 95; Debits 105; Net -10
    - C: Total Income Credits 100; Debits 100; Net -80
    - D: Total Income Credits 0; Debits 20; Net -20
    - Totals: Dividends Received 105; Dividends Paid 105; RIE Receivable 120; RIE Payable 120; Total Income Credits 225; Total Income Debits 225; Net 0
  - Observation: mixed approaches may explain bilateral asymmetries; on a net basis asymmetries may cancel.

### Key implications for compilers and macroeconomic aggregates
- Symmetry and comparability issues:
  - Different interpretations of BPM6 paragraph 11.47 and differing data availability lead to asymmetries across economies.
  - Incomplete along-chain imputations can produce substantial bilateral and aggregate differences in reported income and in GNI.
- Practical compilation considerations:
  - Collecting full along-the-chain information is data-intensive and may not be feasible for many countries.
  - The Immediate Counterpart (Option C) minimizes data collection burden but can distort GNI depending on chain structure and position.
  - Reporting indirect RIE separately (Option B) can preserve methodological attribution while exposing indirect flows, leaving GNI estimation unchanged under the current approach.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/d16-treatment-of-retained-earnings.pdf_