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5310.0.55.002 - Information Paper: Implementation of new international statistical standards in ABS National and International Accounts, September 2009  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 28/10/2009  First Issue
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CHAPTER 9 REINVESTED EARNINGS OF INVESTMENT FUNDS

Warning: The estimates in this publication are indicative. They are presented to give an indication of the magnitude of the impacts of proposed change to Australia's macro-economic accounts. All estimates are subject to refinement and revision in the compilation of the annual Australian System of National Accounts to be published on 8 December 2009, in the quarterly Australian National Accounts to be published on 16 December 2009 and the quarterly balance of payments to be published on 8 December 2009.


INTRODUCTION

Under Balance of Payments Manual fifth edition (BPM5) and System of National Accounts 1993 (SNA93) retained earnings from foreign direct investment are deemed to be distributed and reinvested in the corporation on the grounds that direct investors have control of the corporation and can therefore influence distribution decisions. Under the Balance of Payments and International Investment Position sixth edition (BPM6) and the System of National Accounts 2008 (SNA08), the scope of collection of reinvested earnings data will be widened to include undistributed earnings of investment funds with respect to both foreign and domestic investors on the grounds that investors are able to withdraw and reinvest the equity from the investment funds equity. Reinvested Earnings of investment funds are earnings that are not distributed to unitholders and are kept by the fund instead. The new standards recommend that retained earnings should be treated as if distributed and reinvested. These add to the fund's equity, and its liabilities to the unitholders.  Reinvested Earnings are negative if the fund is paying distributions in excess of its distributable income. This is considered a withdrawal of equity.


CONCEPTS

Investment funds will be identified based on a set of characteristics that institutions in the financial sector exhibit. For more information on investment funds, including a description of characteristics and classification of investment funds, see chapter 2. The changes made in BPM6 and SNA08 relate to investment income attributed to investment fund shareholders which will be reflected in two separate items. The first of these is the dividends distributed to investment fund shareholders. The second is retained earnings attributed to investment fund shareholders.

The dividend component will be recorded in exactly the same manner as dividends for corporations. The retained earnings component will be recorded using the same principles as those described for foreign direct investment enterprises. That is to say, it will be distributed to the shareholders and will be reinvested into the fund by the shareholders in a transaction recorded in the financial account. A consequence of the new treatment of the retained earnings of investment funds is that the saving of investment funds will be zero.

Earnings and therefore investment income attributable to owners of investment funds will be defined to exclude holding gains and losses arising from investment by the funds. Holding gains and losses will be recorded in the other changes in financial assets and liabilities account, not transaction accounts.


MEASUREMENT ISSUES

Domestic

There will be instances of large negative reinvested earnings occurring in periods when distributions include proceeds from holding gains, as the calculation of investment fund earnings and derived reinvested earnings will not include proceeds from holding gains. As earnings accrue continuously, it is important to record the imputed distribution of retained earnings continuously; the size of the imputed reinvested earnings is influenced by the actual distribution pattern. Actual distributions occur infrequently, once or twice per year. For these reasons quarterly estimates of retained earnings and reinvestments will be included in National Accounts, Balance of Payments and transactions in international investment.

1 Reinvested earnings for Domestic Investment Funds - 1997-98 to 2007-08

1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m

Non-money Market Investment Funds  
-1 302
-1 131
-1 298
-2 525
479
-277
-560
-2 489
-310
-3 863
-13 725
  - financial
-1 148
22 718
-1 380
-2 880
290
-42
-1 933
-3 320
-5 727
-7 557
-1 439
  - non-financial
-154
-23 849
82
355
188
-235
1 373
831
5 417
3 694
-12 286
Money market Investment funds  
611
805
1 366
1 176
718
758
1 144
1 270
1 512
2 119
2 647



In accordance with SNA08, investment funds will be separated into money market investment funds and non-money market investment funds. In the table above, non-money market investment funds will be further broken down into financial and non-financial categories. These classifications are described in chapter 2 of this information paper.


International

There will be no impact on direct investment as a result of the revised treatment of earnings of investment funds in BPM6 and SNA08. Any reinvested earnings of direct investment by investment funds will continue to be treated as direct investment under the new standards.

There will be a number of issues for portfolio investment. For foreign liability flows the calculation of reinvested earnings is fairly straightforward because this is a subset of the domestic investment fund estimates. For foreign asset flows however, there are some issues with identifying the investment funds' portion of funds under management reported by funds managers in the foreign investment survey. Forms testing found that providers were unable to differentiate income sourced from dividends and returns from capital gains, nor were they able to report earnings on their investments in addition to the dividends already reported. It is hoped that providers will at least be able to supply levels of investment in investment funds in order to derive a split between investment funds and other portfolio equity. From this split it will be possible to apportion dividend income data and then derive investment earnings and reinvested earnings from these figures.

As most of the foreign assets portfolio equity is sourced from resident fund managers and pension funds, it will be assumed at this point that all of the portfolio equity held or managed by these institutions will be in the form of units in foreign investment funds.


METHODOLOGY

The methodology used to calculate reinvested earnings of investment funds will be:

Reinvested Earnings = Earnings (net of capital gains/losses) - Distributions

Foreign assets: To derive investment earnings, it will be assumed at this point that the bulk of this is in equity funds. The major indicator dividend yields reported on major contributing countries' stock indexes will be applied to existing levels reported in portfolio equity securities for the relevant sectors. Reported income taken from dividends will be subtracted from the derived earnings figure to give reinvested earnings.

Foreign liabilties: To derive investment earnings, the indicator yield taken from a major Australian stock index will be applied to existing levels reported in portfolio equity securities for relevant sectors. Reported income taken from dividends will be subtracted from the derived earnings figure to give reinvested earnings.

2 Reinvested earnings for foreign assets investment funds - 1997-98 to 2007-08

1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Foreign assets
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m

BPM 5 income
652
884
925
1 230
1 401
1 717
1 789
2 312
3 029
3 459
4 848
Dividends
652
884
925
1 230
1 401
1 717
1 789
2 312
3 029
3 459
4 848
Reinvested earnings
-
-
-
-
-
-
-
-
-
-
-
BPM 6 income
939
982
1 224
1 602
2 011
2 557
2 462
2 892
3 609
4 465
6 035
Dividends
652
884
925
1 230
1 401
1 717
1 789
2 312
3 029
3 459
5 055
Reinvested earnings
287
98
299
372
610
840
673
580
580
1 006
980

- nil or rounded to zero (including null cells)

Figure 1 - Foreign assets, Income on a BPM5 and BPM6 basis - 1997-98 to 2007-08
Graph: Figure 1 - Foreign assets, Income on a BPM5 and BPM6 basis—1997–98 to 2007–08

3 Reinvested earnings for foreign liabilities investment funds - 1997-98 to 2007-08

1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Foreign liabilties
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m

BPM 5 income
63
67
86
103
148
250
254
481
632
899
1 305
Dividends
63
67
86
103
148
250
254
481
632
899
1 305
Reinvested earnings
-
-
-
-
-
-
-
-
-
-
-
BPM 6 income
474
601
583
616
743
679
937
1 211
1 444
1 759
2 080
Dividends
63
67
86
103
148
250
254
481
632
899
1 305
Reinvested earnings
411
534
497
513
595
429
683
730
812
860
775

- nil or rounded to zero (including null cells)

Figure 2 - Foreign liabilities, income on a BPM5 and BPM6 basis - 1998-99 to 2007-08
Graph: Figure 2 - Foreign liabilities, income on a BPM5 and BPM6 basis—1998–99 to 2007–08


Reinvested Earnings are negative if the fund is paying distributions in excess of its distributable income. Included above are some graphs and tables illustrating the possible magnitude of the impact of the BPM6/SNA08 standards changes on the Balance of Payments in a time series from 1998-99 to 2008-09.


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