Transcript The unquoted shares in the French financial accounts

The unquoted shares in the French
financial accounts
An implementation of the Eurostat method
Dominique Durant
Banque de France - SESOF
15 April 2005
Introduction
• Unquoted shares are valued as own funds at book value
time a “capitalisation ratio”, calculated on quoted shares
• The “capitalisation ratio” should take into accounts
differences between quoted and unquoted shares
• The topic is crucial for the French financial accounts as
unquoted companies are about 2 million in France and
represent 72% of total own funds at book value in 2000
• It may be also especially difficult to identify the holder of
this type of shares
Outlines
1
The valuation of unquoted shares in French FA
1.1 An implementation of the Eurostat method
1.2 Specific issues in the implementation of the Eurostat method
1.3 The calculation of the liquidity discount
2
The holding of unquoted shares in the French FA
2.1 The general method used to split shares among holders
2.2 The information available for unquoted shares
2.3 The results of a better use of the data sources
1. The valuation of unquoted shares in
the French FA
Several methods were tested following the conclusions of two
European Working groups (MUFA 1998 – Eurostat 2003):
• Data published 1995 (ESA79): paid up capital time a
capitalisation ratio, calculated on SBF 250 index
• Data published 2000 (ESA95): own funds at book value
(including reserves) time capitalisation ratios, on 9
branches and on the whole French stock exchange
• Data published 2005: own funds at book value (including
reserves and results for the current year) time capitalisation
ratios, calculated on 11 branches and on the French stock
exchange without Stoxx 600 and small companies.
Resident liabilities in unquoted shares (billion euros)
3 000
2 500
2 000
1 500
1 000
500
published 1995
published 2000
2005 (estimations)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
0
1.1 An implementation of the
Eurostat method
• The data sources
• The calculation of stocks
– For semi-definitive and definitive accounts
– For provisional accounts
The data sources
Own funds at book value in balance sheet databases (valuation
at acquisition cost):
• For MFIs (S122) and OFIs (S123) excluding mutual funds,
supervisory exhaustive database (BAFI), quarterly
information, for flows and stocks
• For other sectors -insurance companies (S125), financial
auxiliaries (S124) and non financial corporations (S11):
– For flows, sample database managed by the Banque de France
(FIBEN), annual information on balance sheets, complemented
with special events from commercial courts
– For stocks, exhaustive database of fiscal balance sheets managed by
the National statistical institute (SIE), annual information available
with a two-years delay
The calculation of stocks
Flows of unquoted shares issued are directly available; stocks
are calculated, with a method which depends on the version
of the accounts:
• For definitive (N-3) accounts: own funds at book value of
the companies of one branch by the “capitalisation ratio”
calculated for this specific branch on comparable quoted
companies
• For provisional (N-1) and semi-definitive (N-2) accounts:
stocks are obtained from flows, cumulated with the N-3
stocks, re-valued with a suitable index (i.e. cylindered rate
of increase in the market value of companies not included
in the Stoxx 600 index and with own funds larger than 10
million euros).
Definitive accounts (N-3)
OFUSi = Own funds at book value for the unquoted shares of
one of the 11 NACE branches i
OFQSi = Own funds
at book value
MVQSi = market value
of quoted companies
belonging to NACE branch i with
own funds larger than 10 euros millions
not included in the Stoxx 600 index
MVUS = total market value of unquoted shares issued


MVQS i
MVUS    OFUSi 
 0.75 
OFQS i


Provisional (N-1) and
semi-definitive (N-2) accounts
Fn = net variation of own funds at book value for unquoted
companies during year n
MVQSn = market value of quoted companies of any branch, with
own funds larger than 10 euro millions not included in the
Stoxx 600 index at end year n
Index i is such as: in 1
MVQS n1

 0.75
MVQS n2
in  2
MVQS n2

 0.75
MVQS n3
MVUSn-1 = (MVUSn-2 + 1/2Fn-1) × in-1 +1/2Fn
MVUSn-2 = (MVUSn-3 + 1/2Fn-2) × in-2 +1/2Fn-2
1.2 Specific issues in the implementation of
the Eurostat method
• The exclusion of Stoxx 600 companies
• The definition of the NACE branches in relation with the
ESA 95 sectors
• The insufficient number of quoted companies
• The valuation of outward direct investment in unquoted
shares
The exclusion of Stoxx 600 companies (1)
• median ratio for large companies included in Stoxx 600
higher than the median ratio for all large companies
• ratios higher for small companies than for medium and large
companies
Capitalisation ratios by size in the european database
10
1998-excl.Stoxx600
1999-excl.Stoxx600
2000-excl.Stoxx600
1998-all
1999-all
2000-all
8
6
4
2
0
<0.1
-2
-4
0.1 to <1
1 to <10
10 to <100
100 to <1000
1000 and
over
The exclusion of Stoxx 600 companies (2)
• In order to replicate a structure, the weighted average conveys
more information than the median.
• The exclusion of small companies has not any significant effect
on the ratio calculated as a weighted average.
• The exclusion of companies included in Stoxx 600 index has a
significant effect on the weighted average ratio, because they are
large:
– Stoxx 600 companies’ ratio is larger than other large companies’ ratio but
lower than small and medium size companies’ ratio.
– Exclusion of Stoxx 600 companies may higher or lower the average
branch ratio, depending on the relative size of these 2 opposite effects.
• One solution may be to use the median instead of the weighted
average.
Definition of ESA 95 sectors in
relation with NACE branches (1)
Branch i
1
2
3
4
5
6
NACE code
30, 313, 32, 332, 333, 642, 7133, 72
C+E
D (except 30, 313, 32, 332, 333)
F
G
H+I (except 642)
7
8
9
10
65
66
67
K (except 7133, 72,7415) + others
11
7415
Short denomination
ICT activities
Mining, Energy
Manufacturing (non ICT)
Construction
Trade
Hotel and restaurants, Transports and
communication (non ICT)
Financial intermediation
Insurance
Financial and insurance auxiliaries
Real estate, non financial services (non ICT,
non holdings), Others
Holdings
Definition of ESA 95 sectors in
relation with NACE branches (2)
Separate ratios may be calculated for unquoted shares issued by
the different ESA95 sectors.
Sectors j should be defined like that :
If j = S11, i  1, 2, 3, 4, 5, 6,10,11
If j  S122, S123 , i= 7
If j = S124, i = 9
If j = S125, i = 8
But the NACE branches don’t match exactly the ESA95
sectors, in the French company database, leading to time
consuming reclassifications.
The insufficient number of
quoted companies
The French Stock exchanges comprises less than 800
companies, which means on average 70 companies by
branch. However:
• some branches may be highly concentrated of poorly
represented (“energy and mining”, “construction” and
“insurance”
• with a larger branch’s population by branch, listing and delisting of large companies with extreme ratios may change
significantly the average branch ratio, leading to large
changes in the market value of the branch.
The solution is the Pan-European data base because such
unwelcome effects won’t happen on larger populations.
The valuation of direct investments in
unquoted shares
• Inward and outward direct investments are available at book
value for stocks, at transactions value for flows.
• Stocks of inward direct investment in unquoted shares are
valued using the same method (ratios and indices by branch) as
resident holdings in unquoted shares.
• Stocks of outward direct investments in unquoted shares are
valued by cumulating valued flows:
MVUSn = (MVUSn-1 + 1/2F) × in +1/2F.
Index i is a compound of foreign stock exchange indices and
exchange rates.
• Disequilibria may follow the lack of harmonisation in the
methods for inward and outward direct investment. The solution
may be to share information on ratios internationally .
1.3 The liquidity discount
• ESA95 - 7.54: “the values of unquoted shares, which are not
regularly traded on organised markets, should be estimated with
reference to the values of quoted shares. However, these estimates
should take into account differences between the two types of
shares, notably their liquidity”
• Liquidity discount estimated at 25% by Claude Picart from the
INSEE:
– A financial link database + a balance sheet data base for French companies
– In the year of acquisition, the own funds at book value of the bought
company is compared with the entry at acquisition value on the asset side
of the buyer, in order to calculate a ratio : the median ratio is 1.26 for
quoted and 1 for unquoted → liquidity discount of 20%.
– Difference in PER for quoted and unquoted equal to 4, using a multi-linear
regression of the PER on the type of company → liquidity discount of 25%
supposing a PER of 16 for quoted.
2. The holding of unquoted shares in
the French FA
• In our case, the holding of unquoted shares is
methodological issue but a practical issue.
not a
• The information used to split listed securities among
holding sectors, is in many cases, not available for
unquoted shares.
2.1 The general method used to split
unquoted shares among holders
• General method
• The treatment of holding sectors providing accounting
information
• The treatment of residual holding sectors
The general method
• As a general method:
– the information on flows is first computed.
– The outstanding amounts are then calculated as valued cumulated flows.
– The valuation index is calculated from the liability side and is the same for
all sectors.
• General government, balance of payment for the rest of the
world and financial corporations provide accounting
information.
• Non financial corporations, households and non profit
institutions serving households are identified altogether as a
residual and thus split using supplementary information
The treatment of holding sectors providing
accounting information
For each end-of-period (T), it is necessary to calculate for national
accounts :
• a flow (F)
• a valorisation (V)
• a stock at market value (SMV)
The official and accounting sources are, depending on the case:
• a flow (f)
• an outstanding amount at market value (smv)
• an outstanding amount at gross acquisition value (sav)
• a realised holding gain or loss (hg or hl) from P&L account
• Flows are available (General government, rest of the world):
– V= (SVMT-1 +1/2F) × i
–F=f
– SVMT = (SMVT-1 +1/2F) ×(1+i)+1/2F = SVMT-1 +V+F
• Outstanding amounts at market value are available (mutual funds):
– V = (svmT + svmT-1) × i/(2+i)
– F = svmT - svmT-1 - V
– SVMT = svmT
• Outstanding amounts at gross acquisition value are available (MFIs,
OFIs, insurance companies):
– F = savT - savT-1 - hg + hl
– V= (SMVT-1 +1/2F) × i
– SMVT= (SMVT-1 +1/2F) ×(1+i)+1/2F = SVMT-1 +V+F
The treatment of residual
holding sectors (1)
The data sources:
•
An information on the sector of the owners of the companies, in % of capital :
– exhaustive database (BAFI) for financial intermediaries
– Sample “financial link” database of the Banque de France for non financial companies
•
A balance sheet data base to obtain the amount of own funds held by the different
owners :
– exhaustive and quarterly supervisory database for financial intermediaries (BAFI),
– sample annual Banque de France database for non financial companies (FIBEN)
•
The identity of the owners of insurance companies is based on assumptions due to
poor information.
•
The amount of unquoted shares held by each residual sectors is the proportion of
own funds held time the residual amount of
The treatment of residual
holding sectors (2)
The calculation:
• The residual flow is calculated as the total amount of
unquoted shares issued minus amounts held by general
government, rest of the world and financial companies.
• The proportion of unquoted shares held by each “residual”
sectors (NFC, HH, NPISH) is calculated yearly.
• The sum of the proportions is made up to 100 and applied to
the residual flow.
• Stocks are obtained by cumulating flows to re-valued stocks.
2.2 The available information
Central
Government
Official data
other central Rest of the
government world
(agencies)
Financial
auxiliaries
Credit
institutions
Accounting data
Mutual fund Other
financial
institutions
S13111
Quotes shares Flow
(QS)
(transaction
value) and
outstanding
amount
(market
value)
S13112
Outstanding
amount (net
asset)
S20
S124
S122
Flow
(transaction
value) and
outstanding
amount
(market
value)
Outstanding
amount, gross
acquisition
value
Outstanding Outstanding
amount,
amount,
market value market value
or gross
acquisition
value
Unquoted
shares (US)
Flow
(transaction
value) and
outstanding
amount (net
asset)
Outstanding
amount (net
asset)
Flow
(transaction
value) and
outstanding
amountt (net
asset)
Other equities Flow
(OE)
(transaction
value) and
outstanding
amount (net
asset)
Outstanding
amount (net
asset)
Outstanding
amount, gross
acquisition
value+
holding ratios
S123B
S123A
Insurance
companies
Supplementary data
Non financial Households
corporations
S125
S11
Outstanding Stocks, gross
amount, gross acquisition
acquisition
value and
value
market value
on a sample;
breakdown
QS, US, OE
on a sample
Quarterly
survey with
custodians
(stocks and
flows)
S14B
Quarterly
survey with
custodians
(stocks and
flows)
Financial link,
BAFI , FIBEN,
(balance
sheets)
databases
Financial link,
BAFI , FIBEN,
(balance
sheets)
databases
Financial link,
BAFI , FIBEN,
(balance
sheets)
databases
Financial link,
BAFI , FIBEN,
(balance
sheets)
databases
2.3 The results of a better use of
the data sources
• Proportion of unquoted shares held by non financial
corporations and households where about 60/40 while
non weighted; they are about 80/20 while weighted.
• Thus, between the data published in 2000 and the one
that will be published in 2005 (according to provisional
results):
– the total amount of unquoted shares held by households is
estimated to drop by 70%,
– the same amount would almost double for non financial
corporations.
Non financial corp. holdings in unquoted shares (euro billion)
1 800
1 600
1 400
1 200
1 000
800
600
400
200
published 1995
published 2000
2005 (estimations)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
0
Households holdings in unquoted shares (euro billion)
1 000
900
800
700
600
500
400
300
200
100
published 1995
published 2000
2005 (estimations)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
0