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

2
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 ... Assetsliabilities; domestic-foreign
 Canadian System of National Accounts (CSNA) 2012 historical revision and international standards
Statistics Canada • Statistique Canada 2020-04-16

International Guidelines
3
SNA 2008
Recent transaction price
Market capitalization (13.71 d)
Net asset value
Present value / price to earnings ratios
Apportioning global value
Own funds at book value
OECD Benchmark Definition of Foreign Direct
Investment – 4 Edition ( FDI-BD4)
Recent transaction price
Market capitalization
-
-
Net asset value
Including goodwill and intangibles
Excluding goodwill and intangibles
Present value of expected earnings
Apportioning global value
Own funds at book value
Statistics Canada • Statistique Canada 2020-04-16

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
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Canada
2020-04-16

Present treatment and valuation
5
Equity types / valuation
1a.
Listed corporate equity, included in portfolio investment (almost all portfolio investment is listed)
Book Value
CSNA
Underlying book value for liabilities; acquisition cost for assets;
Current or Market Value
CSNA
Market value for liabilities;
Market value for assets, with household sector estimates of good quality
Delayed until SNA 2008
Historical Revision in 2012
1b.
Listed Inter-company
(direct) equity investment
2a.
Unlisted corporate equity
(largely included in household assets)
2b.
Unlisted Inter-company
(direct) equity investment
CSNA
Underlying book value for liabilities; largely, acquisition cost for assets
CSNA
Underlying book value for liabilities; underlying book value for assets (though residual estimate in the personal sector)
CSNA
Underlying book value for liabilities; largely, acquisition cost for assets
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Delayed until an approach be developed on unlisted equity
SNA 2008 Historical revision in 2012
Delayed until an approach be developed on unlisted equity, and on intercompany investment
SNA 2008 Historical
Revision in 2012
2020-04-16

Source data for liabilities
6
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
For third quarter 2010 Units
In Sample 5,671
Not In Sample 15,583
Takenone and Other
Total Population
2,233,106
2,254,360
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Domestic corporate equity liabilities
7
Statistics Canada • Statistique Canada 2020-04-16

8
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
Statistics Canada • Statistique Canada 2020-04-16

9
S&P TSX Composite Index About 230 corporations
Corporations > $10 million market value
Corporations < $10 million market value
About 1,000 corporations
About 250 corporations
Toronto Venture Exchange and other exchanges – about additional 4000 corporations representing approximately
2-3% of total market capitalization for listed equity
Statistics Canada • Statistique Canada 2020-04-16

10
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
Statistics Canada • Statistique Canada 2020-04-16

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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 familyheld private corporations
 Treatment of small corporations
Statistics Canada • Statistique Canada 2020-04-16

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Valuing unquoted shares to MV for 2012
Historical Revision
 Based on applying an aggregate market capitalization ratio to the value of unquoted shares
 MV
UQS
= BV
UQS
* [( ΣMV
QS
/ ΣBV
QS
) * Possible
Discount Factor ]
 2 variations over time will be analyzed
 Applied to all unquoted shares
 Applied to subset of all unquoted shares
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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
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Preliminary work revaluing unquoted corporate equity liabilities
14
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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 intercompany investment
Statistics Canada • Statistique Canada 2020-04-16

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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
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Canada
2020-04-16

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
Statistics Canada • Statistique Canada 2020-04-16 17