1. SNA93 Clarification in the Treatment of Corporate Equity Progress of the Task Force on the Valuation and Measurement of Equity (TFVME) Patrick O’Hagan Statistics Canada July 9, 2005

2. Nature of Corporate Equity §Equity is a complex instrument: that specifies some degree of ownership in a firm; is an investment -- in some cases, a marketable security for portfolio and direct investors; is a liability of firms to shareholders in the SNA model; is a measure of the underlying value (net worth) of corporations §Equity can take on different valuations Underlying book value; acquisition cost; current/market value

3. Corporate Equity in the Balance Sheet Account §Equity is a major asset (and liability) category and figures prominently in measures of sector net worth (including IIP) ● Implication on relevance of the statistics §SNA93 is the principal international reference document, but with a minimal discussion of equity ● Principle of equity at current/market value ■ Perceived need to expand, integrate and clarify equity

4. Limited SNA93 Guidance §Shares and other equities should be valued in the balance sheets at their current prices when they are regularly traded on stock exchanges or other organized financial markets. The value of shares in corporations that are not quoted on stock exchanges or otherwise traded regularly should be estimated using the prices of quoted shares that are comparable in earnings and dividend history and prospects, adjusting downward, if necessary, to allow for the inferior marketability or liquidity of unquoted shares. Equity in quasi-corporations should be valued as equal to the value of the quasi-corporations’ assets less the value of their liabilities. (13.74) §In addition, paragraph 13.83 refers to net asset value and residual corporate net worth

5. Equity Classification §Components of equity include: - Listed portfolio investment; - Listed inter-company (direct) investment; - Unlisted inter-company (direct) investment; - Other unlisted equity §Practical and analytical considerations would dictate similar detail, valuation and measurement of equity asset and liability components §Estimation of unquoted equity currently under study; direct investment currently under discussion §Integrated nature of SNA implies need to harmonize

6. TFVME Activities §TFVME is in the process of reviewing the conceptual and methodological issues, in the context of assets and liabilities, including portfolio and inter-company investment, and in the context of the sequence of accounts. §The first meeting of the TFVME was at Statistics Canada in April of 2005, and it focussed on measurement-valuation issues, in particular Measurement issues/options for unquoted equity Measurement issues/options for inter-company (direct) investment equity

7. TFVME Activities (cont’d) §A second and final meeting is scheduled for October of 2005 at the OECD. This meeting will review the initial re-draft of the equity sections of SNA93 as well as consider other issues, such as links to other chapters, links to work on intangible assets and equity stock-flow considerations §It remains to be determined whether the draft should follow a less prescriptive approach than in the current standard (refer to 13.74) §A final report (including a re-draft of the sections on equity in SNA93 will be prepared for the January 2006 AEG meeting

8. Implications for SNA93 The expanded re-draft of relevant sections on equity will focus on: a detailed discussion of equity types to reflect its complex nature; an expanded discussion of practical issues and alternatives in the current/market valuation of corporate equity – in particular, for the difficult area of unlisted equity; an improved link of assets and liabilities to the discussion of equity; an interpretation of residual corporate net worth, as well as its link to firm’s equity liabilities; an improvement in the integration among the chapters that deal with equity (chapters 11, 12, 13, 14)