1. The unquoted shares in the French financial accounts An implementation of the Eurostat method Dominique Durant Banque de France - SESOF 15 April 2005

2. Introduction Unquoted shares are valued as own funds at book value time a “capitalisation ratio”, calculated on quoted shares The “capitalisation ratio” should take into accounts differences between quoted and unquoted shares The topic is crucial for the French financial accounts as unquoted companies are about 2 million in France and represent 72% of total own funds at book value in 2000 It may be also especially difficult to identify the holder of this type of shares

3. Outlines 1The valuation of unquoted shares in French FA 1.1 An implementation of the Eurostat method 1.2 Specific issues in the implementation of the Eurostat method 1.3 The calculation of the liquidity discount 2The holding of unquoted shares in the French FA 2.1 The general method used to split shares among holders 2.2 The information available for unquoted shares 2.3 The results of a better use of the data sources

4. 1. The valuation of unquoted shares in the French FA Several methods were tested following the conclusions of two European Working groups (MUFA 1998 – Eurostat 2003): Data published 1995 (ESA79): paid up capital time a capitalisation ratio, calculated on SBF 250 index Data published 2000 (ESA95): own funds at book value (including reserves) time capitalisation ratios, on 9 branches and on the whole French stock exchange Data published 2005: own funds at book value (including reserves and results for the current year) time capitalisation ratios, calculated on 11 branches and on the French stock exchange without Stoxx 600 and small companies.

6. 1.1 An implementation of the Eurostat method The data sources The calculation of stocks –For semi-definitive and definitive accounts –For provisional accounts

7. The data sources Own funds at book value in balance sheet databases (valuation at acquisition cost): For MFIs (S122) and OFIs (S123) excluding mutual funds, supervisory exhaustive database (BAFI), quarterly information, for flows and stocks For other sectors -insurance companies (S125), financial auxiliaries (S124) and non financial corporations (S11): –For flows, sample database managed by the Banque de France (FIBEN), annual information on balance sheets, complemented with special events from commercial courts –For stocks, exhaustive database of fiscal balance sheets managed by the National statistical institute (SIE), annual information available with a two-years delay

8. The calculation of stocks Flows of unquoted shares issued are directly available; stocks are calculated, with a method which depends on the version of the accounts: For definitive (N-3) accounts: own funds at book value of the companies of one branch by the “capitalisation ratio” calculated for this specific branch on comparable quoted companies For provisional (N-1) and semi-definitive (N-2) accounts: stocks are obtained from flows, cumulated with the N-3 stocks, re-valued with a suitable index (i.e. cylindered rate of increase in the market value of companies not included in the Stoxx 600 index and with own funds larger than 10 million euros).

9. Definitive accounts (N-3) OFUS i = Own funds at book value for the unquoted shares of one of the 11 NACE branches i MVQS i = market value OFQS i = Own funds at book value of quoted companies belonging to NACE branch i with own funds larger than 10 euros millions not included in the Stoxx 600 index MVUS = total market value of unquoted shares issued

10. Provisional (N-1) and semi-definitive (N-2) accounts F n = net variation of own funds at book value for unquoted companies during year n MVQS n = market value of quoted companies of any branch, with own funds larger than 10 euro millions not included in the Stoxx 600 index at end year n MVUS n-1 = (MVUS n-2 + 1/2F n-1 ) × i n-1 +1/2F n MVUS n-2 = (MVUS n-3 + 1/2F n-2 ) × i n-2 +1/2F n-2 Index i is such as:

11. 1.2 Specific issues in the implementation of the Eurostat method The exclusion of Stoxx 600 companies The definition of the NACE branches in relation with the ESA 95 sectors The insufficient number of quoted companies The valuation of outward direct investment in unquoted shares

12. The exclusion of Stoxx 600 companies (1) median ratio for large companies included in Stoxx 600 higher than the median ratio for all large companies ratios higher for small companies than for medium and large companies

13. The exclusion of Stoxx 600 companies (2) In order to replicate a structure, the weighted average conveys more information than the median. The exclusion of small companies has not any significant effect on the ratio calculated as a weighted average. The exclusion of companies included in Stoxx 600 index has a significant effect on the weighted average ratio, because they are large: –Stoxx 600 companies’ ratio is larger than other large companies’ ratio but lower than small and medium size companies’ ratio. –Exclusion of Stoxx 600 companies may higher or lower the average branch ratio, depending on the relative size of these 2 opposite effects. One solution may be to use the median instead of the weighted average.

14. Definition of ESA 95 sectors in relation with NACE branches (1)

15. Definition of ESA 95 sectors in relation with NACE branches (2) Separate ratios may be calculated for unquoted shares issued by the different ESA95 sectors. Sectors j should be defined like that : If j = S11, i But the NACE branches don’t match exactly the ESA95 sectors, in the French company database, leading to time consuming reclassifications. If j = S124, i = 9 If j = S125, i = 8 If j, i= 7

16. The insufficient number of quoted companies The French Stock exchanges comprises less than 800 companies, which means on average 70 companies by branch. However: some branches may be highly concentrated of poorly represented (“energy and mining”, “construction” and “insurance” with a larger branch’s population by branch, listing and de- listing of large companies with extreme ratios may change significantly the average branch ratio, leading to large changes in the market value of the branch. The solution is the Pan-European data base because such unwelcome effects won’t happen on larger populations.

17. The valuation of direct investments in unquoted shares Inward and outward direct investments are available at book value for stocks, at transactions value for flows. Stocks of inward direct investment in unquoted shares are valued using the same method (ratios and indices by branch) as resident holdings in unquoted shares. Stocks of outward direct investments in unquoted shares are valued by cumulating valued flows: MVUS n = (MVUS n-1 + 1/2F) × i n +1/2F. Index i is a compound of foreign stock exchange indices and exchange rates. Disequilibria may follow the lack of harmonisation in the methods for inward and outward direct investment. The solution may be to share information on ratios internationally.

18. 1.3 The liquidity discount ESA95 - 7.54: “the values of unquoted shares, which are not regularly traded on organised markets, should be estimated with reference to the values of quoted shares. However, these estimates should take into account differences between the two types of shares, notably their liquidity” Liquidity discount estimated at 25% by Claude Picart from the INSEE: –A financial link database + a balance sheet data base for French companies –In the year of acquisition, the own funds at book value of the bought company is compared with the entry at acquisition value on the asset side of the buyer, in order to calculate a ratio : the median ratio is 1.26 for quoted and 1 for unquoted → liquidity discount of 20%. –Difference in PER for quoted and unquoted equal to 4, using a multi-linear regression of the PER on the type of company → liquidity discount of 25% supposing a PER of 16 for quoted.

19. 2. The holding of unquoted shares in the French FA In our case, the holding of unquoted shares is not a methodological issue but a practical issue. The information used to split listed securities among holding sectors, is in many cases, not available for unquoted shares.

20. 2.1 The general method used to split unquoted shares among holders General method The treatment of holding sectors providing accounting information The treatment of residual holding sectors

21. The general method As a general method: –the information on flows is first computed. –The outstanding amounts are then calculated as valued cumulated flows. – The valuation index is calculated from the liability side and is the same for all sectors. General government, balance of payment for the rest of the world and financial corporations provide accounting information. Non financial corporations, households and non profit institutions serving households are identified altogether as a residual and thus split using supplementary information

22. The treatment of holding sectors providing accounting information For each end-of-period (T), it is necessary to calculate for national accounts : a flow (F) a valorisation (V) a stock at market value (SMV) The official and accounting sources are, depending on the case: a flow (f) an outstanding amount at market value (smv) an outstanding amount at gross acquisition value (sav) a realised holding gain or loss (hg or hl) from P&L account

23. Flows are available (General government, rest of the world): –V= (SVM T-1 +1/2F) × i –F = f –SVM T = (SMV T-1 +1/2F) ×(1+i)+1/2F = SVM T-1 +V+F Outstanding amounts at market value are available (mutual funds): –V = (svm T + svm T-1 ) × i/(2+i) –F = svm T - svm T-1 - V –SVM T = svm T Outstanding amounts at gross acquisition value are available (MFIs, OFIs, insurance companies): –F = sav T - sav T-1 - hg + hl –V= (SMV T-1 +1/2F) × i –SMV T = (SMV T-1 +1/2F) ×(1+i)+1/2F = SVM T-1 +V+F

24. The treatment of residual holding sectors (1) The data sources: An information on the sector of the owners of the companies, in % of capital : –exhaustive database (BAFI) for financial intermediaries –Sample “financial link” database of the Banque de France for non financial companies A balance sheet data base to obtain the amount of own funds held by the different owners : –exhaustive and quarterly supervisory database for financial intermediaries (BAFI), –sample annual Banque de France database for non financial companies (FIBEN) The identity of the owners of insurance companies is based on assumptions due to poor information. The amount of unquoted shares held by each residual sectors is the proportion of own funds held time the residual amount of

25. The treatment of residual holding sectors (2) The calculation: The residual flow is calculated as the total amount of unquoted shares issued minus amounts held by general government, rest of the world and financial companies. The proportion of unquoted shares held by each “residual” sectors (NFC, HH, NPISH) is calculated yearly. The sum of the proportions is made up to 100 and applied to the residual flow. Stocks are obtained by cumulating flows to re-valued stocks.

26. 2.2 The available information

27. 2.3 The results of a better use of the data sources Proportion of unquoted shares held by non financial corporations and households where about 60/40 while non weighted; they are about 80/20 while weighted. Thus, between the data published in 2000 and the one that will be published in 2005 (according to provisional results): – the total amount of unquoted shares held by households is estimated to drop by 70%, –the same amount would almost double for non financial corporations.