HomeSNAISWGNAKnowledge BaseDataTechnical CooperationPublications
You are here:   ISWGNA >> Research Agenda >> List of Research Issues >> Issue 17

17. Reinvested earnings

 The issue

According to the concept of reinvested earnings, the difference between the entrepreneurial income of the enterprise and the actual distribution of dividends in the accounting year would be regarded as an acquisition (or withdrawal if negative) of equity by the owner.

This treatment presents two major advantages:  
- It would represent a full accrual accounting for equity income, consistent with the basic principles of accruals underlying SNA. Dividends cannot be considered as a distribution out of income in the sense normally used in the SNA which refers to income earned in the current period and corporations do not view them in that way.
- It would solve the problem of the borderline between dividends and withdrawals of equity and its implication on the owner's net lending/net borrowing. The AEG has agreed that "exceptional" payments of dividends corporations to government had to be recorded as withdrawals of equity (and not dividends as in the current SNA). But what is "exceptional"? The reinvested earnings approach rationalizes this problem: the net lending/net borrowing of the owner would not anymore correspond to dividends but would correspond to entrepreneurial income. This is consistent with the fact that the entrepreneurial income represents the accrued income of the (quasi) corporation in the current period, which is considered by the owners as the economic return of their equity investments.

For instance, if the entrepreneurial income is 100 and dividends paid 220, the property income by the owner will correspond to dividends (220) plus equity income/reinvested earnings (-120), and its net lending/net borrowing will equal 100. In the owner's financial account, cash will be recorded corresponding to 220 and shares and other equity will decrease (-120).

In the enterprise accounts, dividends (220) plus equity income (-120) will correspond to a total of uses of 100, counterbalancing the entrepreneurial income (100) on the resources side. Net leading/net borrowing is equal to zero. In the financial account, cash (-120) on the assets side is counterbalanced by a reduction in liabilities towards the owner (shares and other equity -120).

 Reasons for inclusion in the Research Agenda

Eurostat considers that the concept of reinvested earnings should be extended to public and private quasi corporations, to public corporations and to private corporations, when the units concerned are publicly controlled or when there is a single owner with controlling interest (at least 50%). This issue should be examined, as this new treatment would, in our opinion, improve the consistency of the system.

An important advantage for the system as a whole would be to generally allow more recording of income than hitherto, and to accordingly deflate the revaluation accounts by that portion that reflects the mere accumulation of undistributed earnings (the accounting example above is the reverse case, probably less common, of distribution in excess of the profit).  

From the point of view of government accounts, reinvested earnings allow reporting a government deficit inclusive of losses (profits) of public corporations in a similar manner as if a subsidy scheme existed to cover the loss of the year.

About  |  Sitemap  |  Contact Us
Copyright © United Nations, 2014