Task Force on the Valuation and Measurement of Equity Positions

Send

Second Meeting of the TFVME, Paris, OECD, October 12-13, 2005
Basic Issues
Mandate of the TFVME
Organisation of the TFVME
Role of the web page
Reference period for the Task Force
First Meeting of the TFVME, Ottawa, Canada, April 14-15 2005

The objective of the Task Force on the Valuation and Measurement of Equity Positions (TFVME) is to expand and clarify the treatment of the item Shares and other equity in The 1993 SNA, so as to be able to better serve as a guide towards classifying and measuring equity. In addition, TFVME will review methodological issues. This, in turn, will assist in promoting a harmonized treatment of equity internationally, by providing much needed guidance to compilers.

The 1993 SNA is the key document in terms of the conceptual framework for national accountants. However, it has a very minimal discussion of equity in Chapters 12 and 13. In fact, The 1993 SNA has no breakdowns of category Shares and other equity (AF.5) . Paragraph 13.73 of SNA 93 just mentions that ''the value of shares that are not quoted on stock exchanges or otherwise regularly traded 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'', but without making reference to specific issues or methods. The issue is, however, very relevant, as unquoted shares in many countries are far more important than quoted shares. Nonetheless, little progress was formerly made in producing harmonized data on unquoted shares.

The discussion in the OECD Workshop on Unquoted Shares (Paris, 13 October 2004) demonstrated the requirement to consider equity more fully, and in the context of an integrated system of accounts. Specifically, it showed the need to consider the valuation of all types of equity as well as to take into account the related work currently being carried out elsewhere. In particular, this includes OECD-IMF DITEG efforts on the concept/valuation of direct investment equity for the revision of the Balance of Payments Manual and on the OECD Benchmark Definition of FDI, as well as the practical work on unquoted shares undertaken by WGUS.

Basic Issues

There are a number of reasons to undertake this work on equity. First, in most developed economies, equity is a large asset (and liability). Therefore, a sound conceptual framework and harmonized methodological approach to measurement is deemed important. Clearly, this has a direct link to the relevance of the statistics.

Second, the nature of equity is of different nature than that of other financial instruments. Equity is a complex instrument that is both an investment (security) and also a measure of the underlying value (net worth) of corporations. In the balance sheet account chapter of The 1993 SNA there is no discussion of the treatment of equity assets or liabilities. In particular, there is also no discussion of the valuation, treatment or breakdown of inter-company versus portfolio equity investment assets (typically broken down on the asset side) and how this relates to the total for equity liabilities of corporations. However, this breakdown is an important consideration for national accountants .

Third, valuation of equity is complicated by the existence of listed (quoted) and unlisted (unquoted) shares. The main issue is how to value unlisted shares - with reference to listed shares, or by alternative methods. This is further complicated by two factors: the degree by which traded shares can be reliably used to value unquoted equity; and, the different types of unlisted equity held by investors. A broader question might be one of the appropriate valuations of these different types of unlisted equity.

Fourth, in an integrated system of national accounts there are cross-cutting considerations with respect to equity which should be taken into account, the most important of which is the link between the balance sheet account and the international investment position. This consideration would have the advantage of harmonizing SNA93 with other issues and standards up for revision, in particular BPM#5.

Fifth, market valuation is held up as the ideal in The 1993 SNA. At the same time, alternatives are proposed in other areas, where market value may be difficult to estimate. No such proposals are made in the case of equity.

Clarification in The 1993 SNA, along these lines will go a long way to assist statisticians in both classification and measurement of equity components.

Mandate of the TFVME

TFVME is mandated to clarify the treatment of equity in The 1993 SNA. TFVME will review in depth the conceptual and methodological issues surrounding the valuation of equity, in the context of assets and liabilities, including portfolio and inter-company investment, and in the context of the sequence of accounts, by:

reviewing in detail the conceptual framework of equity (and its components) in the integrated system of accounts
reviewing and assessing conceptual and methodological approaches to valuation of equity
coordinating studies and test exercises carried out on the valuation of different types of equity
supplementing existing research on the difficult issue of the valuation of unlisted equity
exchanging information through a webpage established by the OECD
liaising with other working groups, EDGs and Task Forces that may be involved in certain aspects of equity valuation, with a view to synthesizing and harmonizing the results
identifying areas where harmonization of international standards may be an issue, in particular between The 1993 SNA and BPM#5.
reporting to the OECD WPNA-WPFS
drafting recommendations to be forwarded to the Inter-secretariat Working Group on National Accounts (ISWGNA) for amending The 1993 SNA, so as to expand and clarify the existing sections on equity and to add additional sections, where it is deemed necessary.

Organisation of the TFVME

TFVME is organized under the auspices of the OECD. The secretariat will function under the chair of the Task Force.

The TFVME is composed of representatives (in particular financial and BOP statisticians) from relevant national bodies (statistical offices, central banks etc.), and international organizations. The participation is open to all OECD member countries.

The TFVME is chaired by Anders Nordin (OECD).

Role of the web page

The Webpage aims at (i) providing documentation on the valuation of different types of equity, and (ii) being a site for documents to be posted prior to meetings of the TFVME.

Reference period for the Task Force

The first meeting of the Task Force on the Valuation of Equity (TFVME) is tentatively scheduled for 14-15 April 2005 at the Statistics Canada in Ottawa.

The Task Force will tentatively meet again prior to the fall meeting of the WPNA and WPFS.

First Meeting of the TFVME, Ottawa, Canada, April 14-15 2005
Hotel information in Ottawa
Practical information about the arrival at Statistics Canada
List of participants
Draft Agenda revised

.  General issues background note -- Task Force on the valuation and measurement of equity - note by Canada
. The valuation of unquoted shares: a european test exercise
.  The unquoted shares in the French financial accounts (revised): an implementation of the Eurostat method - PowerPoint presentation
.  Valuation of shares and other equity in the financial accounts of the Spanish economy - PowerPoint presentation
.  Valuation of unquoted shares in the US financial accounts - PowerPoint presentation
. Questionnaire on the valuation of equity
   - Summary of the questionnaire replies
   - Austria
   - Belgium
   - Canada
   - Denmark
   - Finland
   - France1
   - France2
   - Italy
   - Holland
   - Japan
   - Slovak Republic
   - Sweden
   - Switzerland
   - United Kingdom
.  Elaboration of a more precise nomenclature of households' financial assets: conclusions of the pilot-project meeting of 5 July 2004