## d16-treatment-of-retained-earnings

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### SECTION I: THE ISSUES — Background: nature and measurement of retained earnings and RIE
- DI income on equity includes "all the distributed and undistributed current operating earnings of a DI company." Distributed earnings = dividends or withdrawals from income of quasi corporations; undistributed earnings are imputed as reinvested earnings (BPM6, paragraph 3.18).
- 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 11.34).
- NOS exclusions and accounting treatment:
  - NOS should exclude realized and unrealized holding gains and losses derived from valuation changes, gains or losses due to other changes in volume of assets (write-offs, write-downs, provisions), and should treat R&D and own-account production of software as assets not expenses.
- Practical constraints to operationalizing RIE:
  - Enterprise financial statements often lack the detail needed to separate NOS as defined; non-standardized national GAAP vs IFRS formats impede automation; obtaining detailed information from foreign-controlled entities is complex and costly; commercial databases usually do not provide the necessary detail.
- Measurement challenges for financial corporations:
  - Financial corporations’ profits may include holding gains beyond normal trading margins; provisions for loan losses must be separated by law and can make announced accounting profits diverge from statistical recording.
- Draft team note: calculation and operationalization of NOS and RIE are difficult and costly, especially for foreign-controlled entities, long ownership chains, and SPEs.

### ISSUE 1 — Calculation of Reinvestment of Earnings (RIE): conceptual and operational clarifications
- BPM6 guidance excerpts and interpretation:
  - Reinvestment of earnings defined as "the corresponding entry and equal to reinvested earnings" (paragraph 8.15).
  - Retained earnings: "net earnings from production and primary and secondary income transactions before attributing reinvested earnings" (paragraph 11.34).
  - Reinvested earnings: "the direct investors’ share of the retained earnings of the direct investment enterprise" (paragraph 11.40).
- Proposed clearer retained earnings definition:
  - Modify to: "Retained earnings of an enterprise shows the net earnings from current production and primary and secondary income transaction that has not been distributed" (remove reference to reinvested earnings). Once retained earnings are calculated, reinvested earnings = part owned by the direct investor based on percentage ownership.
- Areas needing further clarification:
  - Change in pension entitlements is mentioned only in paragraph 11.34 and not elsewhere in BPM6 discussion of RIE.
  - "Enterprise’s share of RIE of any DIEs" values are not included in enterprises’ profit and loss (P&L) statements.
- Provisions and credit institutions — issues and options:
  - Current income concept does not deduct expenses related to provisions for losses on long-term contracts; for credit institutions, obligatory provisions for bad loans are large and significantly affect profitability; overstatement of DI income is often corrected by negative price revaluations.
- Options to address provisions in RIE calculation:
  - Option 1: Deduct obligatory provisions for bad loans when calculating the RIE to be imputed to the direct investor, leaving them as savings of the DIE.
    - Implications:
      - would not change macroeconomic treatment of provisions as current accounts treatment remains unchanged (provisions not considered current expenses);
      - would increase Gross National Income (GNI) of the DIE’s economy because part of DIE earnings would remain as savings in that economy;
      - would not recognize in the balance of payments and IIP the financing of provisions provided by the direct investor.
  - Option 2: Keep the current RIE imputation and present provisions as a memorandum item.
    - Implications:
      - preserves measurement of GNI for the DIE’s economy;
      - improves analyst understanding of statistical income figures, especially during financial crises when provisions surge;
      - isolating regulatory provisions should not generate additional reporting burden and would align with financial accounting, reducing adjustments by compilers/reporters.
- DITT view:
  - Calculation and operationalization of NOS and RIE are difficult and costly; most members favor clarifying BPM6 or the BPM Compilation Guide with examples, accounting mapping, country experiences, and modelling/alternatives to reduce reporting burden.

### ISSUE 2 — RIE treatment/classification along the DI ownership chain: recording indirect RIE
- BPM6 guidance (paragraph 11.47): "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 would include reinvested earnings derived from its immediate DIE, which in turn would include reinvested earnings from its immediate DIE, and so on; reinvested earnings are passed on to indirect direct investors through the chain.
- Applicability and practical challenges:
  - Recording indirect RIE applies to economies at the top or middle of multinational chains.
  - If resident entity is on the top of the chain: RIE from indirectly held enterprises should be included in the resident entity’s DI income (receivables).
  - If resident entity is in the middle of the chain: receivables should be allocated to the foreign direct investor in addition to the payables of RIE of the resident entity.
  - Calculating indirect RIE is particularly challenging with significant SPEs or pass-through entities and long ownership chains; intermediate entities often lack the information to calculate RIE.
- Ambiguities and compilation consequences:
  - BPM6 guidance is confusing because RIE receivable values are not in immediate DIE’s P&L; different compiler interpretations exist and incorrect DI income recording can materially affect level and partner allocation of income statistics and contribute to global and bilateral asymmetries.
- Alternatives considered for treatment of earnings generated down the DI ownership chain:
  - Alternative A: Status quo — recognize all earnings generated down the DI ownership chain in primary income (conceptually and analytically sound but difficult for compilers in the middle of the chain).
  - Alternative B: Recognize all earnings generated down the DI ownership chain as primary income but report indirect income separately (transparent and enhances comparability; complicated for countries with consolidated data unable to separate immediate DIE income).
  - Alternative C: Limit imputation of RIE to the P&L account of the immediate DIE (could improve comparability and reduce asymmetries but would change measurement of RIE and GNI).
- DITT positions:
  - Majority conceptually favor attributing all earnings generated below the chain as RIE but acknowledge practical challenges.
  - Half of members favor imputing only immediate-DIE RIE for simplicity and to minimize asymmetry issues.
  - Some members strongly oppose simplification on conceptual grounds.
  - Recommendation to include more detailed guidance and practical examples where data exist; consider reporting imputed indirect RIE separately as an "of which" to improve comparability.

### ISSUE 3 — Investment fund shareholders’ investment income and retained earnings
- Investment funds as collective investment schemes:
  - Funds raise funds by issuing shares/units to the public that become shareholders; funds legally and economically own the financial assets invested (BPM6, paragraph 4.74).
- BPM6 treatment of undistributed earnings of investment funds:
  - Paragraph 11.38: undistributed earnings of investment funds are imputed as payable to the owners and then reinvested in the funds (applies to DI and portfolio investment).
  - Consequence: net savings of investment funds is always zero because net earnings belong to shareholders and are either distributed or reinvested.
- Calculation and scope:
  - Treatment and calculation of investment funds’ RIE are the same as for RIE of any other DIEs.
  - Holding gains and losses are excluded from income generated by the fund and are reflected under revaluation flows (BPM6, paragraph 11.39).
  - Reinvestment of earnings may be negative (e.g., when a fund pays dividends out of realized holding gains or when accumulated prior period earnings are distributed).
- Ambiguities and open questions:
  - BPM6 paragraphs 10.124–10.125 and 11.38 lack specific guidance on deducting operating expenses when calculating investment funds’ RIE; unclear whether management service charges or fees (explicit or implicit) and taxes should be considered.
- Recording conventions for investment funds’ income:
  - Investment funds’ asset pool generates interests on debt securities and deposits (adjusted for FISIM), dividends, rents on real estate, investment income attributable to investment funds shareholders (only credits, e.g., for funds of funds), and other income.
  - Interest on debt instruments and rents recorded on an accrual basis (BPM6, paragraphs 11.49 and 11.89); equity income recorded on ex-dividend date (BPM6, paragraph 11.31); holding gains/losses excluded from net income (BPM6, paragraph 11.39).
- Treatment of operating expenses, FISIM, and attribution to shareholders:
  - Clarification of paragraph 11.38: investment income attributable to shareholders should exclude operating expenses attributable to the investment fund.
  - Operational interpretation: investment income is attributed to the shareholder as investment income; financial services incurred by the fund are charged to the shareholder as financial services (operating expenses recorded as services, not as reductions in attributable income).
  - Explicit expenses paid by shareholders recorded as financial services paid by shareholders to counterparts classified as financial auxiliaries (“S.126”).
  - Implicit expenses and FISIM: for simplicity, record as financial services paid by shareholders to the investment fund (classified as “S.123” or “S.124”), then record financial service transaction between the fund and the real service provider (financial auxiliaries “S.126”).
  - These financial services should exclude taxes on income and wealth directly payable by the investment fund from its assets.
- DITT consensus and recommendations:
  - All DITT members agreed RIE and net income should always be compiled regardless of fund type, assets held, dividend policy, liquidity, or law/statute of constitution.
  - DITT members largely supported the methodological approach recommended in the guidance note while recognizing implementation challenges, notably unavailability of data on implicit costs; mitigation via data sharing and industry-provided estimation guidelines was suggested.
  - ESCB initiated 2018 discussions to compile investment fund income attributable to shareholders on a security-by-security (SBS) basis consistent with BPM6 methodology (overview in Annex II).

### Outcomes, scenarios, and illustrative examples (ownership chains and compilation options)
- ESCB WG ES model for IFs’ income (Annex II) — data handling and estimation:
  - Merge CSDB output extracts and apply decision tree: use SBS income where available; else estimate using the “Accrued Income Factor” (AIF) attribute from CSDB.
  - For AIF-only estimates apply a seasonality ratio based on funds with SBS income data clustered by fund type.
  - Results: IFs’ income estimates using the ESCB WG ES model are robust and in line with ECB and Eurostat submissions; approach substantially improves estimates where macro statistics models were previously in place.
- Annex III illustrative ownership-chain examples (A → B → C → D, 100 percent direct holdings at each link):
  - Under current standards, head company A should include total NOS of group (110) broken down into dividends (30) and RIE (80) and attribute to affiliate B even if not generated by B.
  - Example scenarios demonstrated:
    - Example 1 (BPM6 Recording / Alternative A): perfect recording with imputations of non-distributed income from all subsidiaries; totals balance with net zero across economies.
    - Example 1a (Option B): BPM6 recording with separate reporting of indirect RIE to enhance transparency; totals balance.
    - Example 2 (Immediate Counterpart / Option C): only imputations related to immediate DIE are recorded; totals balance with different distribution of RIE and net income.
    - Example 3 (Mixed — only head implements implicit earnings): head office records full imputations; others record only immediate-DIE RIE, producing asymmetries (total income net = 40 in example).
    - Example 4 (Mixed immediate counterpart and BPM6): A records full imputations; others impute RIE from immediate subsidiary plus resident RIE; on net basis asymmetries may cancel.
  - Implications: different country practices and data availability drive sizeable bilateral asymmetries (e.g., EU vs US current account differences); presenting indirect RIE separately can enhance transparency without changing the conceptual basis.

### Questions for discussion and recommended actions posed to decision-makers
- Issue 1:
  - Revise BPM6 paragraphs on retained earnings and reinvested earnings per discussion in paragraphs 15 and 16.
  - Clarify/address shortcomings in DI income compilation and include RIE calculation examples in the revised BPM or BPM Compilation Guide.
  - Separate obligatory provisions for bad loans as a memorandum item when calculating RIE for credit institutions.
- Issue 2:
  - Decide whether recognition of all earnings generated down the DI ownership chain as primary income is conceptually best (Alternative A) and whether practical challenges justify deviation to a simpler basis (Alternative C).
  - If keeping Alternative A, decide whether presenting indirect income separately (Alternative B) enhances transparency and comparability.
- Issue 3:
  - Confirm RIE and net income should always be compiled regardless of fund attributes.
  - Agree or not with the proposed treatment of operating expenses charged explicitly or implicitly in compiling investment funds’ RIE.

*International Monetary Fund — Direct Investment Task Team guidance on retained earnings and reinvested earnings*

### SECTION I: THE ISSUES

### d16-treatment-of-retained-earnings - SECTION I: THE ISSUES

### BACKGROUND: nature and measurement of retained earnings and 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 in the DIE (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.
- NOS should exclude:
  - realized and unrealized holding gains and losses derived from valuation changes, including revaluation of fixed assets, changes in market prices of financial assets and liabilities, or exchange rate changes;
  - gains or losses due to other changes in volume of assets, such as write-offs, write-downs, and provisions;
  - and should assure that research and development (R&D) and own-account production of software are treated as assets and not as expenses.
- Practical constraints to operationalizing RIE calculation:
  - enterprise financial statements often lack the detailed information needed to separate NOS as defined above;
  - non-standardized financial statement formats across enterprises (national GAAP vs IFRS) impede automation;
  - obtaining detailed information from foreign companies, even when controlled by a resident direct investor, can be complex and costly;
  - commercial databases for listed and unlisted enterprises usually do not provide the necessary detail.
- These constraints are salient given the Committee’s agreement to add supplementary information on portfolio investment RIE to the balance of payments.
- Measurement challenges are acute for financial corporations:
  - financial corporations’ activities and profits are based on financial trading and may include holding gains beyond normal trading margins in accounting data;
  - provisions for loan losses, which must be separated by law, can make announced financial-accounting profits diverge from statistical recording;
  - Figure 1 (Euro area consolidated banking data) highlights the relevance of provisions versus P&L net provisions (note: Figure 1 is referenced as evidence of the issue).

### ISSUE 1 — Calculation of Reinvestment of Earnings (RIE): conceptual and operational clarifications
- BPM6 guidance excerpts and interpretation:
  - "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'."
- Proposed clearer definition in the guidance note:
  - Modify retained earnings definition to: "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.
- Areas needing further clarification in BPM6 update or compilation guide:
  - change in pension entitlements is mentioned only in paragraph 11.34 and not elsewhere in BPM6 discussion of RIE;
  - values of "Enterprise’s share of RIE of any DIEs" are not included in enterprises’ profit and loss (P&L) statements.
- Provisions and treatment for credit institutions:
  - Current concept of income does not deduct expenses related to provisions for losses on long-term contracts because they are not considered intermediate consumption of the sector.
  - For credit institutions, obligatory provisions for bad loans are large and significantly affect profitability; overstatement of DI income is often corrected by negative price revaluations.
- Options to address provisions in RIE calculation:
  - Option 1: Deduct obligatory provisions for bad loans when calculating the RIE to be imputed to the direct investor, leaving them as savings of the DIE. Implications:
    - would not change macroeconomic treatment of provisions as current accounts treatment remains unchanged (provisions not considered current expenses);
    - would increase Gross National Income (GNI) of the DIE’s economy because part of DIE earnings would remain as savings in that economy;
    - would not recognize in the balance of payments and IIP the financing of provisions provided by the direct investor.
  - Option 2: Keep the current RIE imputation and present provisions as a memorandum item. Implications:
    - preserves measurement of GNI for the DIE’s economy;
    - improves analyst understanding of statistical income figures, especially during financial crises when provisions surge;
    - from a practical perspective, isolating regulatory provisions should not generate additional reporting burden and would align with financial accounting, reducing adjustments by compilers/reporters.
- Additional practical points:
  - The draft team notes that the calculation and operationalization of NOS and RIE are difficult to implement and costly, especially for foreign-controlled entities and in presence of long ownership chains and SPEs.

### ISSUE 2 — RIE treatment/classification along the DI ownership chain: recording indirect RIE
- BPM6 guidance: paragraph 11.47—"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 would include reinvested earnings derived from its immediate direct investment enterprise, which as a direct investor would receive reinvested earnings from its immediate direct investment enterprise, and so on; reinvested earnings are passed on to the indirect direct investors through the chain indirectly.
- Applicability and practical challenges:
  - Recording RIE from indirectly held enterprises applies to economies at the top or in the middle of multinational investment chains.
  - If resident entity is on the top of the chain, RIE from indirectly held enterprises should be included in the resident entity’s DI income (receivables).
  - If resident entity is in the middle of the chain, receivables should be allocated to the foreign direct investor in addition to the payables of RIE of the resident entity.
  - Calculating indirect RIE is particularly challenging where Special Purpose Entities (SPEs) or other pass-through entities play a significant role.
  - Long ownership chains hinder distinction between operational and non-operational earnings, complicating COPC and non-COPC measurement for each enterprise layer.
  - Entities in the middle of chains often lack the information needed to calculate RIE; compilation is burdensome and time-consuming for compilers and reporters.
- Ambiguities and need for clarification:
  - BPM6 guidance is confusing about including RIE derived from an entity’s immediate DIE because values of RIE receivables are not in the immediate DIE’s P&L statement.
  - Different interpretations exist among compilers; further clarification and examples should be included in the updated manual.
  - Incorrect DI income recording can materially affect level and partner allocation of income statistics and contribute to global and bilateral asymmetries.
- Alternatives considered for treatment of earnings generated down the DI ownership chain:
  - Alternative A: Status quo — recognize all earnings generated down the DI ownership chain in primary income (conceptually and analytically sound but difficult for compilers in middle of chain).
  - Alternative B: Recognize all earnings generated down the DI ownership chain as primary income but report indirect income separately (transparent and enhances comparability; complicated for countries with consolidated data unable to separate immediate DIE income).
  - Alternative C: Limit imputation of RIE to the P&L account of the immediate DIE (could improve comparability and reduce asymmetries but would change measurement of RIE and GNI).
  - The drafting team is split: some favor reporting imputed indirect RIE separately as an "of which" in reported data to improve comparability; others prefer the simplification of Alternative C.

### ISSUE 3 — Investment fund shareholders’ investment income and retained earnings
- Investment funds:
  - are collective investment schemes that raise funds by issuing shares or units to the public that become shareholders (BPM6, paragraph 4.74);
  - as legal and institutional units, they legally and economically own the financial assets in which the funds raised are invested.
- BPM6 treatment of undistributed earnings of investment funds:
  - BPM6, paragraph 11.38: undistributed earnings of investment funds are imputed as being payable to the owners and then reinvested in the funds. This applies to both DI and portfolio investment.
  - Consequence: net savings of investment funds is always zero because net earnings (net investment income) belong to shareholders and are either distributed as dividends or reinvested.
- Calculation and scope:
  - Treatment and calculation of investment funds’ RIE are the same as for RIE of any other DIEs.
  - Holding gains and losses are not considered in the income generated by the fund and are reflected under revaluation flows (BPM6, paragraph 11.39).
  - Reinvestment of earnings may be negative (e.g., when a fund pays dividends out of realized holding gains or when accumulated prior period earnings are distributed).
- Ambiguities and open questions:
  - BPM6, paragraphs 10.124–10.125 and 11.38 lack specific guidance on deducting operating expenses when calculating investment funds’ RIE; unclear whether management service charges or fees (explicit or implicit) and taxes should be considered.
- Practice and compilation guidance:
  - ESCB began discussions in 2018 to compile investment fund income attributable to shareholders on a security-by-security (SBS) basis consistent with BPM6 methodology; an overview of the compilation model is included in Annex II (referenced).
- Recommendation:
  - Retained earnings (and net income) generated by investment funds should always be compiled regardless of fund type (open-ended vs closed-ended), assets held, dividend distribution policy (distributing vs cumulative), level of liquidity or law/statute of constitution. The compilation of investment funds’ income attributable to shareholders should follow the guidance suggested in this guidance note.

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

### 24. Investment funds’ assets pool generates different types of income and may also incur in

### d16-treatment-of-retained-earnings - 24. Investment funds’ assets pool generates different types of income and may also incur in

### Types of income generated by investment funds and recording conventions
- Investment funds’ assets pool generates:
  - Interests on debt securities and deposits (and eventually on loans taken) adjusted for financial intermediation services indirectly measured (FISIM).
  - Dividends associated with equity securities.
  - Rents on real estate.
  - Investment income attributable to investment funds shareholders (only credits, e.g., for funds of funds).
  - Other income received (e.g., income attributable to insurance policy holders, standardized guarantees and pension funds).
- Recording conventions:
  - Interest on debt instruments and rents are recorded on an accrual basis (BPM6, paragraphs 11.49 and 11.89, respectively), excluding FISIM from the former in the case of deposits and loans.
  - Equity related income is recorded on ex-dividend date (BPM6, paragraph 11.31).
  - Holding gains and losses are excluded from the net income generated by the fund (BPM6, paragraph 11.39).
- Post-income uses:
  - Net investment income is used to pay taxes on income and wealth attributable to the fund (distinct from withholding taxes paid by the fund on behalf of shareholders).
  - The residual is attributable to shareholders under the 2008 SNA “investment income attributable to collective investment fund shareholders (D443)”.

### Treatment of operating expenses, FISIM, and attribution to shareholders
- Clarification of BPM6 paragraph 11.38:
  - Investment income attributable to shareholders should exclude operating expenses attributable to the investment fund.
  - Operational interpretation: investment income is attributed to the shareholder as investment income, while financial services incurred by the fund are charged to the shareholder as financial services (i.e., operating expenses are recorded as services, not as reductions in attributable income).
  - Operating expenses therefore have no impact on the compilation of net investment income generated by the fund and should be recorded as services (see Annex I).
- Explicit vs implicit expenses:
  - Explicit expenses paid by shareholders should be recorded as financial services paid by shareholders to the respective counterpart (e.g., management company and brokers). These counterparts are classified as financial auxiliaries (“S.126”) per BPM6, paragraphs 4.79–4.81.
  - Expenses implicitly paid by shareholders and FISIM should, for simplicity, be recorded as financial services paid by the shareholders to the investment fund (classified as “S.123” or “S.124”, see BPM6, paragraphs 4.73–4.75).
  - Subsequently, a financial service transaction between the investment fund and the real service provider (management company, brokers, custodians, auditors, promoters — all financial auxiliaries “S.126”) should be recorded.
  - These financial services should exclude any taxes on income and wealth directly payable by the investment fund from its assets.
  - Correct allocation of exports/imports requires identification of the residency of involved agents (e.g., management company and investment fund).

### Outcomes and options considered by the Direct Investment Task Team (DITT)
- Issue 1: Calculation of RIE (reinvested earnings)
  - DITT members largely agreed language in some BPM6 paragraphs (paragraphs 3.4, 11.41, 11.34, and 11.43) should be improved to clarify RIE and retained earnings and remove inconsistencies with current treatment of RIE as transactions.
  - All DITT members but one supported clarifying aspects of RIE compilation either in BPM or in the BPM Compilation Guide; suggested inclusions:
    - Useful examples, mapping with standard accounting terminology, country experiences.
    - Modelling or alternatives to data collection to avoid increasing reporting burden.
  - Drafting team proposal regarding provisions:
    - Consider new interpretation that provisions (e.g., regulatory provisions for bad loans) cannot be potentially distributed and therefore should remain as savings of the DIE, lowering reinvested earnings.
    - Under this proposal, DIE income components: dividends (distributed), RIE, and savings equal to new provisions.
    - Most DITT members agreed provisions treatment could be re-considered but that AEG discussion is needed given likely impact on GNI measurement.
    - Many members preferred presenting provisions as a memorandum item to facilitate analysis without changing the general statistical framework or GNI measurement.
- Issue 2: RIE treatment/classification along the DI ownership chain
  - Conflicting views on imputing RIE from all subsidiaries in the DI ownership chain vs only RIE from the immediately held DIE.
  - Majority favored, on conceptual grounds, attributing all earnings generated below the DI ownership chain as RIE, though acknowledged practical estimation challenges.
  - Half of DITT members favored imputing only RIE from the immediately held DIE for simplicity and to minimize asymmetry issues.
  - A few members strongly opposed the simplification on conceptual grounds.
  - Recommendation to include more detailed guidance and practical experience for compilers where data exist.
- Issue 3: Calculation of RIE by investment funds
  - All DITT members agreed that RIE and net income should always be compiled regardless of fund attributes.
  - DITT members largely supported the methodological approach recommended in the guidance note, while recognizing implementation challenges.
  - Main practical problem: unavailability of data on implicit costs; mitigation through data sharing and industry-provided estimation guidelines that compilers could apply.

### Questions for discussion (summary of points posed for decision)
- Issue 1:
  - Revise BPM6 paragraphs on retained earnings and reinvested earnings per discussion in paragraphs 15 and 16.
  - Clarify/address shortcomings in DI income compilation and include RIE calculation examples in the revised BPM or BPM Compilation Guide.
  - Separate obligatory provisions for bad loans as a memorandum item when calculating RIE for credit institutions.
- Issue 2:
  - Whether recognition of all earnings generated down the DI ownership chain as primary income is conceptually best (Alternative A) and whether practical challenges justify deviation to a simpler basis (Alternative C).
  - If keeping Alternative A, whether presenting indirect income separately (Alternative B) enhances transparency and comparability.
- Issue 3:
  - Confirm RIE and net income should always be compiled regardless of fund attributes.
  - Agree or not with the proposed treatment of operating expenses charged explicitly or implicitly in compiling investment funds’ RIE.

### Annex II — ESCB experience compiling investment funds’ income on a security-by-security (SBS) basis
- ESCB WG ES and WG SEC initiatives:
  - In 2018, discussions began on technical implementation in the Centralised Securities Database (CSDB) of SBS income data directly provided by some NCBs to enhance compilation of IFs’ income in line with BPM6.
- Data timeliness and reconciliation challenges:
  - CSDB output files are end-month snapshots; reconciliation of CSDB output, SBS inputs, and quarterly BOP transmission deadlines is challenging due to differences in timeliness and frequency across NCBs.
  - Example timeline for 2019-Q4 BOP transmission (transmitted March 20, 2020):
    - CSDB extracts and revisions produced in Jan-20, Feb-20, Mar-20 with SBS income data availability varying; e.g., SBS income data for some countries only made available on March 10, 2020 in the “February-2020 extract”.
    - Luxembourg typically provides monthly SBS income data with a two-month time lag.
- WG ES suggested compilation model:
  - Merge all available CSDB output extracts and apply a decision tree:
    - Use SBS income data where available.
    - Else estimate using the “Accrued Income Factor” (AIF) attribute from CSDB. AIF estimates daily income rates based on SBS income data for funds with similar characteristics (fund type or asset structure).
  - Account for varying income frequency (weekly to annual): frequency is either directly reported by NCBs or derived by CSDB; for AIF-only estimates apply a seasonality ratio based on funds with SBS income data clustered by fund type.
- Results and benefits:
  - IFs’ income estimates using the ESCB WG ES model are robust and in line with submissions to ECB and Eurostat by EU countries following SBS compilation.
  - The approach substantially improves estimates where macro statistics models were previously in place.
  - For funds with SBS income, corresponding AIF is also available; “enhanced” use of AIF (considering seasonality) is suggested.

### Annex III — Examples of recording indirect RIE along ownership chains
- Illustrative company group: A → B → C → D (100 percent direct holdings at each link); each company resident in different economy.
- Key points and examples:
  - Under current standards, head company A should include total NOS of group (110) broken down into dividends (30) and RIE (80) and attribute to affiliate B even if not generated by B.
  - Table 1 example shows company-level NOS, dividends, and RIE entries with cells indicating information availability for immediate DIEs.
  - Recording asymmetry arises because intermediate compilers (e.g., B) may only have immediate subsidiary accounts and thus under-state imputations (e.g., B records Enterprise’s share of RIE of C as 35 instead of 40).
- Option examples demonstrating compilation approaches:
  - Example 1 (BPM6 Recording / Alternative A): Perfect recording with imputations of non-distributed income from all subsidiaries; totals balance with net zero across economies.
  - Example 1a (Option B): BPM6 recording with separate reporting of indirect RIE to enhance transparency; totals balance.
  - Example 2 (Immediate Counterpart / Option C): Only imputations related to immediate DIE are recorded; totals balance with different distribution of RIE and net income.
  - Example 3 (Mixed — only head of company implements implicit earnings): Head office (A) records full imputations; other countries record only immediate-DIE RIE, producing asymmetries (total income net = 40 in example).
  - Example 4 (Mixed immediate counterpart and BPM6): A records full imputations; others impute RIE from immediate subsidiary plus resident RIE; on net basis asymmetries may cancel.
- Implications:
  - Different country practices and data availability drive sizeable bilateral asymmetries (e.g., EU vs US current account differences).
  - Presentation options (e.g., Option B reporting indirect RIE separately) can enhance transparency and comparability without changing conceptual basis.

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