1. 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. 08/02/2014 Statistics Canada Statistique 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... Assets- liabilities; domestic-foreign Canadian System of National Accounts (CSNA) 2012 historical revision and international standards

3. International Guidelines SNA 2008 OECD Benchmark Definition of Foreign Direct Investment – 4 Edition (FDI-BD4) Recent transaction price Market capitalization (13.71 d)Market capitalization Net asset value - Including goodwill and intangibles - Excluding goodwill and intangibles Present value / price to earnings ratiosPresent value of expected earnings Apportioning global value Own funds at book value 08/02/2014 Statistics Canada Statistique Canada 3

4. 08/02/2014 Statistics 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

5. Present treatment and valuation 08/02/2014 Statistics Canada Statistique Canada 5

6. Source data for liabilities 08/02/2014 Statistics Canada Statistique Canada 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

7. Domestic corporate equity liabilities 08/02/2014 Statistics Canada Statistique Canada 7

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 08/02/2014 Statistics Canada Statistique Canada 8

9. 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 08/02/2014 Statistics Canada Statistique Canada 9 Toronto Venture Exchange and other exchanges – about additional 4000 corporations representing approximately 2-3% of total market capitalization for listed equity

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 08/02/2014 Statistics Canada Statistique Canada 10

11. 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 08/02/2014 Statistics Canada Statistique Canada 11

12. 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 08/02/2014 Statistics Canada Statistique Canada 12

13. 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 08/02/2014 Statistics Canada Statistique Canada 13

14. Preliminary work revaluing unquoted corporate equity liabilities 08/02/2014 Statistics Canada Statistique Canada 14

15. 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 08/02/2014 Statistics Canada Statistique Canada 15

16. 08/02/2014 Statistics Canada Statistique Canada 16 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

17. 08/02/2014 Statistics Canada Statistique Canada 17 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