Valuation of Equity in the Canadian System of National Accounts

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

23-04-20Statistics 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


23-04-20Statistics Canada • Statistique Canada

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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


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


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


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


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


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


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


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


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


Preliminary work revaluing unquoted corporate equity liabilities


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


23-04-20Statistics 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


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

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Valuation of Equity in the Canadian System of National Accounts

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