EQUITY AND NET WORTH ACCOUNTING IN THE NATIONAL BALANCE SHEETS

Peter van de VenHead of National Accounts, OECD

NBS-OECD Workshop on National AccountsGuangzhou, December 2 – 5, 2014

Introduction

• Net Worth in SNA 2008

• Estimating shares and other equity

• Negative Net Worth?

• Own funds in business accounting

• Some examples of macro-economic indicators from national accounts

Net Worth in SNA 2008

• Assets

– Non-financial assets• Produced assets

– Fixed assets

– Inventories

– Valuables

• Non-produced assets– Tangible assets

» Land

» Mineral and energy resources

» Other natural resources

– Intangible assets

– Financial assets

• Liabilities

• Net worth

Estimating shares and other equity

• Net Worth according to SNA 2008 includes the item “shares and other equity” as a liability

• Depending on the estimation of “shares and other equity”, net worth can be positive, zero or even negative

• Methods for calculation “shares and other equity”– Listed shares: stock market value

– Unlisted shares: see next slide

– Other equity = equity in corporations that do not issue shares (e.g. public corporations, quasi-corporations, central bank, unlimited liability corporations): set equal to assets minus debt liabilities => Net Worth = 0

Estimating shares and other equity

Valuation of unlisted shares (see SNA 2008, para. 13.71):•Recent transaction price

•Net asset value (appraisals by management or independent auditors)

•Present value or price to earnings ratio

•Book values reported by enterprises

– Adjusted for differences in valuation

– Adjusted with ratio share value / book value of listed corporations

•Own funds at book value

•Apportioning global value, using ratio of sales or other indicators to total share value (applicable for e.g. global enterprise groups)

Estimating shares and other equity

Valuation of unlisted shares (see SNA 2008, para. 13.71):•Recent transaction price

•Net asset value (appraisals by management or independent auditors)

•Present value or price to earnings ratio

•Book values reported by enterprises

– Adjusted for differences in valuation

– Adjusted with ratio share value / book value of listed corporations

•Own funds at book value

•Apportioning global value, using ratio of sales or other indicators to total share value (applicable for e.g. global enterprise groups)

Negative Net Worth?

• For many corporations net worth will be zero or close to zero, depending on the valuation techniques for equity

• For listed companies with tradable shares, the market value of equity can be (substantially) different from assets minus debt liabilities (all liabilities excluding equity)

• If stock market value is higher, then negative Net Worth– Not all relevant assets giving rise to future benefits/profits may be

recognised and recorded : brand names, mastheads, organisational capital, etc.

– Volatility of stock markets, not properly reflecting the “true” underlying value of the corporation; speculative price movements

– Various valuation issues

Own funds in Business Accounting

• Assets

– Non-financial assets• Produced assets

– Fixed assets

– Inventories

– Valuables

• Non-produced assets– Tangible assets

» Land

» Mineral and energy resources

» Other natural resources

– Intangible assets

– Financial assets

• Debt liabilities• (Provisions and contingencies)

• Own funds

Further differences between SNA and Business Accounting

• Application of different valuation techniques, especially for non-financial assets (current replacement costs vs. historic valuation)

• Differences in asset boundary, especially concerning intangible assets

• All kinds of errors and omissions

Example of macro-economic indicators from national accounts (1)

Ratio of debt to operating surplus for non-financial corporations

Examples of macro-economic indicators from national accounts (2)

Ratio of debt to equity for financial corporations

Examples of macro-economic indicators from national accounts (3)

Leverage of the banking sector: Ratio of selected assets to equity for financial corporations

Thank you for your attention!

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