Equity and net worth accounting in the national balance sheets

Equity and net worth accounting in the national balance sheets Peter van de Ven Head of National Accounts, OECD NBS-OECD Workshop on National Accounts Guangzhou, 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)

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

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Equity and net worth accounting in the national balance sheets