Item III.12: Super Dividends Training on general introduction to ESA 2010 Luxembourg, 9 - 10 December 2013 Eurostat, JMO M4

Concept of dividends Payments made by corporations to shareholders are called dividends (D.421). Dividends are a form of property income in the ESA framework. Dividends are recorded in a corporation's accounts when decided by the owners of the corporation (general assembly), usually based on the observed profit of the last accounting year. Sometimes, in large corporations preparing quarterly accounts, "interim dividends" are paid during the accounting year, before the final yearly earnings are known.

What is a "Super-dividend"? When payments become "too large" in relation to the recent level of dividends and earnings, national accounts have to question their treatment as property income. A large payment may not result from the profit of the year, realised by the corporation, but from a withdrawal of its own funds, or a sale of assets, or revaluation proceeds. A corporation may smooth the amounts of dividends paid from year to year. But payments disproportionally large, in excess as compared to the recent level of earnings and dividends, should not be treated as "dividends" but as "super-dividends".

Treatment of super-dividends in ESA 2010 (1) If the level of dividends declared is greatly in excess, the amounts causing the excess are classified as "super-dividends" and treated as financial transactions. Two super-dividends tests are introduced in ESA 2010: One for private corporations (with domestic or foreign control); One for public corporations (general government control), for which the rules are more strict.

Treatment of super-dividends in ESA 2010 (2) The focus on public corporations is justified by the impact of the split dividends/super dividends on the public deficit: A dividend is a property income (non-financial transaction) which improves the net lending of the owners of the corporation; A super-dividend is a financial transaction in which cash received represents withdrawal of equity by the owners, so not impacting the net lending of the owners of the corporations.

Super-dividend test for private corporations (1) The test is a ratio comparing dividends to distributable income over the recent past in order to access the plausibility of the current level of dividends. Corporations may smooth the amounts of dividends they pay from year to year. In one year they may put part of the profit into a reserve and distribute it in the following year.

Super-dividend test for private corporations (2) But large payments reduce the own funds of a corporation, they correspond to a capital withdrawal, to be recorded as a transaction on shares and other equity. The rationale for recording super-dividends as financial transactions is to consider that super-dividends are different in nature from dividends: whilst dividends correspond to a distribution of income, super-dividends correspond to a distribution of the corporation's wealth, reducing its own funds.

Example of a split between dividends and super-dividends Distributable income and dividends of a private corporation: In years 1 to 3, dividends represent 50% to 75% of distributable income. In year 4, their level is disproportionally large as compared to the recent level of dividends and earnings. The total of 150 should be split in two parts: dividends (around 60) and super-dividends (around 150-60=90)   Year 1 Year 2 Year 3 Year 4 Distributable income 100 140 80 Dividends 50 70 60 150

The concepts of entrepreneurial income and distributable income Output (P.1) - Intermediate consumption (P.2) = Value added (B.1g) - Compensation of employees (D.1) - Taxes on production and imports (D.2) net of subsidies (D.3) = Operating surplus + Property income receivable (D.4 receivable) - Interest and rent payable (dividends excluded( (D.41 and D.45 payable) = Entrepreneurial income (B.4g) + Current transfers receivable less payable (D.5 to D.8 receivable less payable) = Distributable income

Super-dividend test for public corporations Super-dividends of public corporations correspond to the difference between the payments and the entrepreneurial income of the relevant accounting period. Any amount in excess to the entrepreneurial income of the public corporation is to be recorded as a transaction in equity (F.5) In Year 4, 120-80=40 are to be considered as super-dividends and treated as F.5 Equity (in the financial account) rather than D.421 Dividends (in the allocation of primary income account)   Year 1 Year 2 Year 3 Year 4 Entrepreneurial income 100 80 Dividends 50 70 60 120

Case of "interim dividends" If there is hard evidence from the public corporation's intra-annual accounts that it is making sufficient profits to be able to fund the dividend from its expected income for the whole year, the interim dividend is treated as property income (D.421 dividends). If there is no hard evidence, the interim payment is to be recorded as a financial advance F.89 other accounts payable for government, and F.89 other accounts receivable for the public corporation. Then the whole dividend is subject to the super-dividend test after the annual results of the corporation are known with certainty in the following year.

Relevant paragraphs in ESA 2010 and M.G.D.D edition 2013 ESA 2010 paragraphs 4.55, 4.56, 4.61, 20.205, 20.206, 20.207 M.G.D.D edition 2013 – part III.5 2008 SNA, paragraphs 7.131, 7.134, 11.90. 22.136