1. March 2007 AEG meeting Chapter 13 Main substantive comments

2. Comments Comments from: Mexico, Ireland, Norway, Switzerland, Finland, Korea, South Africa, UNSD, OECD, Russia, Australia, ECB, Eurostat, IMF, Germany, Hong Kong, Netherlands, Czech Republic, Israel, Sweden, Denmark, USA 3 major substantive issues to the AEG 34 comments will be considered by the ISWGNA 114 comments will be considered by the editor

3. Question 1.b: Own funds Not linked directly to 44 issues, but introduced by editor Own funds = business accounting The term own funds appears in 15 paragraphs of the SNA 93, while it was not defined. There is indeed reasons that there is a corresponding definition of own funds in the SNA. New paragraph 13.95 defines own funds as : « the difference between the net worth (defined as the sum of its assets less the sum of its liabilities) and the value of the share-holders equities may be referred to as own funds. »

4. Question 1.b: Own funds A = Assets, L = Liabilities, S = Shares, OL = Other liabilities than shares. L = S + OL Net worth = A – L = A – S – OL ??? Own funds = Net worth – Shares = A – S – OL – S ????

5. What are own funds? Personal presentation They correspond essentially to the shares issued (equity capital) + the reserves (non distributed profits) that the corporation has raised and retained as part of its own capital (and thus not due to anybody). As shares issued and reserves are invested in corporations’ assets, the value of own funds can be obtained from the value of the assets of the corporation. However, part of the assets of the corporation have been financed using non own funds, i.e. loans, or other liabilities (loan capital). Thus in business accounting: own funds = total assets minus liabilities (loan capital).

6. Question 1.b: Own funds In the SNA, shares = liability (this is wrong in business accounting) In the SNA the corresponding definition of own funds : Total Assets minus Total Liabilities excluding shares

7. Question 1.b: Own funds Own funds = Total Assets – Total liabilities excluding shares = A – (L –S) Own funds = A – (L – S) = A – OL = A – L + S = Net worth + Shares

8. Question 1.b: Own funds Does the AEG agree that a definition of own funds should be included in SNA 93 rev 1? Does the AEG agree that this definition should refer to the content of own funds: this is capital which is owned by the unit, through issuance of shares and retained earnings? Does the AEG agree that SNA rev 1 explains that Own funds can be obtained as : Total assets – Total liabilities excluding shares Or, equivalently, as : Net worth + shares. ****************************

9. Question 1.c: own funds The concept of net worth applied to corporations is questionable. Net worth = A – L = A – S – OL Net worth excludes Shares, while shares are own funds. Does the AEG agree that, for the analysis of corporations, the SNA recommends using the concept of own funds, which is more adapted? ********************************

10. Question 1.c: retained earnings Paragraph 13.95 proposes the incorporation in the SNA of the concept of retained earnings. Retained earnings = amount of corporation’s income available for distribution as dividend but not distributed. Retained earnings >< from reinvested earnings

11. Question 1.c: retained earnings Advantage of retained earnings: concept close to business accounting (undistributed profit) => own funds. Logic of extension of SNA: extend the treatment of reinvested earnings (research agenda)? Does the AEG confirm that it is useful to include the concept of retained earnings in the SNA, even having refused to extend the treatment of reinvested earnings? ******************************

12. Question 1.a: valuation of unlisted shares The task force on valuation of equity proposed four methods to value unlisted shares: –Market capitalisation method –Other methods: Net asset value Present value Own funds at market value

13. Question 1.a: valuation of unlisted shares Paragraph 13.74 presents the following decision tree: –Market capitalisation method –Net asset value –Present value If none applicable, own fund at book value Does the AEG agree to this change of the task force proposal? *********************************

14. Question 2: other equity Paragraph 13.80 describes the content of this entry. « special shares »: public corporations, central bank, partnerships. Does not mention the counterpart of reinvested earnings, Does not mention « financial assets that non resident units in their capacity as owner of land buildings on the economic territory have against notional resident units » ESA 95 (5.95) : long list of possibilities.

15. Question 2: other equity Does the AEG agree to propose to better describe the content of « Other equity », at least by mentionning the counterpart of reinvested earnings, and the counterpart of foreign owned dwellings? *******************************

16. Question 3: balance sheet in volume terms The SNA does not discuss of balance sheets in volume terms or in real terms. Does the AEG recommends to add a section promoting balance sheets in volume and/or real terms? If yes, should it be in volume term or in real term?