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Valuation of Equity in the Canadian System of National Accounts
OECD Working Party on Financial Statistics
Allan Tomas
Chief, Financial and Wealth Accounts
Income and Expenditure Accounts Division
Statistics Canada
23-04-10Statistics Canada • Statistique Canada2
Introduction and some basic issues
Equity is a financial instrument with different valuations across guidelines
Listed and unlisted equity Inter-company investment; privately-held firms Choice of methods to revalue unlisted equity Consistency across economic statistics ... Assets-
liabilities; domestic-foreign Canadian System of National Accounts (CSNA) 2012
historical revision and international standards
International Guidelines
SNA 2008 OECD Benchmark Definition of Foreign Direct Investment – 4 Edition (FDI-BD4)
Recent transaction price Recent transaction price
Market capitalization (13.71 d) Market capitalization
Net asset value Net asset value-Including goodwill and intangibles-Excluding goodwill and intangibles
Present value / price to earnings ratios Present value of expected earnings
Apportioning global value Apportioning global value
Own funds at book value Own funds at book value
23-04-10Statistics Canada • Statistique Canada3
23-04-10Statistics Canada • Statistique Canada
4
Progress in balance sheets and IIP in Canada in recent years
Multi-year initiative to improve CSNA balance sheet data … including International Investment Position
Move to quarterly data releases, within 75 days after the reference period
Move to market valuation for portfolio positions No changes as yet to inter-company (direct) investment
or for unlisted equity in published data RESULT: Mixture of valuations Provisional estimates calculated in 2005 and 2006
Present treatment and valuation
23-04-10Statistics Canada • Statistique Canada5
Equity types / valuation Book Value Current or Market Value 1a. Listed corporate equity, included in portfolio investment (almost all portfolio investment is listed)
CSNA Underlying book value for liabilities; acquisition cost for assets;
CSNA Market value for liabilities; Market value for assets, with household sector estimates of good quality
1b. Listed Inter-company (direct) equity investment
CSNA Underlying book value for liabilities; largely, acquisition cost for assets
Delayed until SNA 2008 Historical Revision in 2012
2a. Unlisted corporate equity (largely included in household assets)
CSNA Underlying book value for liabilities; underlying book value for assets (though residual estimate in the personal sector)
Delayed until an approach be developed on unlisted equity SNA 2008 Historical revision in 2012
2b. Unlisted Inter-company (direct) equity investment
CSNA Underlying book value for liabilities; largely, acquisition cost for assets
Delayed until an approach be developed on unlisted equity, and on inter-company investment SNA 2008 Historical Revision in 2012
Source data for liabilities
23-04-10Statistics Canada • Statistique Canada6
For third quarter 2010 Units In Sample 5,671 Not In Sample 15,583 Takenone and Other 2,233,106 Total Population 2,254,360
Quarterly Financial Statement Survey (QFS) Source of balance sheet and income statement data for
corporate sector Stratified Sample by Assets and Revenue QFS Take-all (sampled with certainty) represent
largest corporations whether quoted or unquoted
Domestic corporate equityliabilities
23-04-10Statistics Canada • Statistique Canada7
Asset side estimates in the balance sheet accounts
For large institutional investors (trusteed pension plans, investment (mutual) funds, life insurance companies, chartered banks) portfolio investment equity assets are at market value
For sectors where portfolio holdings are available only at acquisition cost, market value estimates are estimated using implicit mark-up factors
Inter-company investment (including foreign) remains at book value
23-04-10Statistics Canada • Statistique Canada8
Demography of the Toronto Stock Exchange
S&P TSX Composite Index
About 230 corporations
Corporations > $10 million market value
About 1,000 corporations
Corporations < $10 million market value
About 250 corporations
23-04-10Statistics Canada • Statistique Canada9
Toronto Venture Exchange and other exchanges – about additional 4000 corporations representing approximately 2-3% of total market capitalization for listed equity
Importance of unquoted shares in Canada
$1.5 trillion at 2009 with BV Represents about 2/3 of total share liabilities,
when measured with BV BV defined as: share capital + contributed
surplus + retained earnings Accounts for approximately 10% of total financial
assets of the personal sector
23-04-10Statistics Canada • Statistique Canada10
Specific issues in the Canadian context
Propensity to list• 5,500 corps listed; 2,250,000 corps total
Availability of data (balance sheet, earnings) Specific sectors (automotive) and large family-
held private corporations Treatment of small corporations
23-04-10Statistics Canada • Statistique Canada11
Valuing unquoted shares to MV for 2012 Historical Revision
Based on applying an aggregate market capitalization ratio to the value of unquoted shares
MVUQS = BVUQS * [(ΣMVQS / ΣBVQS) * Possible Discount Factor]
2 variations over time will be analyzed Applied to all unquoted shares Applied to subset of all unquoted shares
23-04-10Statistics Canada • Statistique Canada12
Organizing the Market Cap ratios
• Use of data (BV and MV) from matched quoted enterprises to calculate capitalization ratios.
• Effects of:– Organizing enterprises into industry groups– Removing smaller listed enterprises – Removing enterprises that belong to the S&P TSX Composite
index– Possibly applying a liquidity discount to the ratios.
• Effects are observed in the resulting capitalization ratios and the number of enterprises on which the ratios are based
23-04-10Statistics Canada • Statistique Canada13
Preliminary work revaluing unquoted corporate equity liabilities
23-04-10Statistics Canada • Statistique Canada14
Revised asset side estimates in the balance sheet accounts
Approach to re-valuing unquoted equity assets ... Inter-company, including direct investment; private corporations owned by households; other
Importance of balancing asset side estimates to liability side estimates for unquoted equity
Importance of link to FDI compilers for inter-company investment
23-04-10Statistics Canada • Statistique Canada15
23-04-10Statistics Canada • Statistique Canada
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Integrated approach to improved MV equity estimates, including FDI Co-ordination of BSA-FDI work → ↑ accuracy; OCAA Low propensity to list → results ~ methods All methods under consideration … sense that we may
end up with ♣ Market values and transaction prices where these exist ♣ Market capitalization for large unlisted companies ♣ Own funds at book value or present value for smaller unlisted
companies and/or industries-companies with special measurement challenges
Assign new values to estimates of unquoted equity assets-liabilities as part of 2012 historical revisions to CSNA
Continue to monitor IFRS impact on source data
23-04-10Statistics Canada • Statistique Canada17
Concluding remarks
Canada would be very pleased to hear from other country compilers on the estimation of market value balance sheet data and the link to FDI positions
The implicit suggestion is that it would be very useful to continue to review country experiences in WPFS, under SNA08 implementation
This is especially important in the context of different country situations (e.g., variations in propensity to list), potentially giving rise to different approaches → potential for consistency-comparability