The SNA recommends that the retained earnings of a foreign direct investment enterprise should be treated as if they were distributed to foreign direct investors in proportion to their ownership of the equity of the enterprise. These earnings are then reinvested by those owners as additions to equity in the financial account. This amount is in addition to any actual distributions made out of the distributable income. This approach is also adopted for the earnings of investment funds.
It has been proposed that this treatment could be extended to other types of unit, particularly public corporations. If the attribution of retained earnings to the owners of corporations were adopted, it would mean that dividends would be replaced by reinvested earnings in the allocation of primary income account and this total less dividends actually paid would be shown as additions to (or in some case withdrawals from) equity in the financial account. This would mean that distribution of earnings from corporations was measured on a strict accrual basis but would also mean that the saving of corporations would always be zero. Such a change would have serious implications for interpretation of the accounts since it would be built on a different paradigm from the current treatment of dividends and corporate saving. |
