March 2007 AEG meeting Chapter 13 Main substantive

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March 2007 AEG meeting Chapter 13 Main substantive 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

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. »

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 ? ?

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).

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

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

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. **************

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? ****************

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

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? ***************

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

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? *****************

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.

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? ****************

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?

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