What counts as equity

The components of reported equity

Equity on a Belgian company's balance sheet is composed of several standard items, including issued capital, share premiums, revaluation surpluses where applicable, reserves, and retained earnings or accumulated losses carried forward from previous years. Together these represent the net assets attributable to shareholders according to the accounts.

This figure is calculated as total assets minus total liabilities, and it is disclosed as a specific section within the balance sheet in the standardised format used for annual accounts filed with the National Bank of Belgium.

Historical cost accounting shapes the figure

Belgian accounting rules generally record assets at historical cost, adjusted for depreciation where applicable, rather than at current market value. This means equity reflects what assets cost when acquired, reduced by accumulated depreciation, rather than what those assets would sell for today.

For companies whose main assets, such as real estate or long-held investments, have appreciated well beyond their accounting value, reported equity can understate the company's actual net asset position considerably.

Why the statutory formula uses this figure regardless

The statutory formula takes equity exactly as reported in the filed accounts, without any restatement to market value. This is consistent with the formula's role as a simple, mechanical fallback rather than an attempt to capture a company's true economic position.

For a company with recently acquired assets recorded close to current market value, this may not create a large distortion. For a company holding assets acquired long ago, the gap between accounting value and market value can be substantial.

How an independent valuation treats equity differently

An independent valuation report can restate balance sheet items to reflect current values where relevant, for instance by incorporating an updated assessment of real estate holdings or investment securities, rather than relying solely on their historical accounting value.

This adjusted net asset position may then be used alongside other valuation methods, such as those based on earnings, to arrive at an overall value for the shares that better reflects the company's actual financial position at the reference date.

Reading the balance sheet with this in mind

Shareholders reviewing their company's annual accounts benefit from understanding that the equity figure shown is an accounting construct with specific rules behind it, rather than a direct measure of what the company or its shares are actually worth.