CHAPTER XII METHOD (III)—THE LEGAL BALANCE SHEET TOGETHER WITH A SUMMARY OF ASSETS AND LIABILITIES OF SUBSIDIARIES To publish the legal Balance Sheet and Profit and Loss Account of the Holding Company as in Method (I) and to present simultaneously as a separate statement, a summary of the assets and liabilities of all the subsidiary and sub-subsidiary companies taken together. This method of supplementing the legal balance sheet has certain advantages but is not in use to any great extent. The legal balance sheet shows what amount of money is invested in subsidiary enterprises while, in addition, shareholders are furnished with a separate statement showing the total assets and liabilities, duly classified, of all the subsidiary undertakings taken together and, usually, although it is not necessarily shown separately, the amount of the minority or outside shareholders' interest. On the assumption that the net total of the assets and liabilities is linked up with the figures in the holding company's legal balance sheet it will show the amount of goodwill, if any, in the cost of the shares or any surplus of tangible assets belonging to the holding company and not taken up in its own balance sheet. It may be said that there is one distinct disadvantage in the aggregation of the assets and liabilities in this way in that it does not show how they are spread over the different concerns, and that while this may not be of importance to a shareholder of the holding company, it may considerably affect a creditor of a subsidiary concern as the aggregated statement gives no indication whatever of the relative position of the individual companies. It should, however, be remembered that the statement is designed to deal with the interests of the parent company in its subsidiaries and is not prepared for the information of creditors of individual subsidiary concerns. From the point of view of the directors of the holding company, the aggregation of the assets and liabilities may be an advantage, as the interests of the merger as a whole may be better served by the concentration of the operations in different places and under different control, e.g. production by one company and distribution by another. Comparison of results in such circumstances, or the publication of separate figures, might give an erroneous impression, as from the standpoint of the holding company they may be regarded as one. Summary of Assets and Liabilities of Subsidiaries Many of the points which have to be considered in the preparation of this statement also arise in the preparation of the consolidated balance sheet of the whole undertaking which is referred to in the next chapter and accordingly it is not proposed to go into them in detail here. Among these points are the possibility of subsidiary companies' accounts being prepared at different dates, the absence of any uniform classification of assets and liabilities, the values of assets of different concerns being computed by varying methods, etc. A mere aggregation of figures from existing balance sheets without taking these factors into consideration would serve no useful purpose and be of no practical value. Again there is the question as to what holding would be considered sufficient to justify incorporating the assets and liabilities in a consolidated statement and the very important points arising on the ascertainment of the minority or outside shareholders' interests. There are also questions relating to the elimination of intercompany balances and unrealised inter-company profits which have to some extent been dealt with already. It is as well to prepare the statement in columnar form as set out in the example in Appendix I. With a uniform classification of assets the work is rendered much easier and for simplicity it has been assumed that the assets of the companies dealt with in Appendix I are uniformly classified. Inter-company balances, including those with the holding company, should be shown under a separate heading and must be eliminated from the final totals of assets and liabilities. Final dividends of subsidiary companies paid since the date of the balance sheet should be shown amongst the liabilities in so far as they have been received by outside shareholders. Special care should be taken to set off inter-subsidiary company dividends, leaving in the liabilities only an amount representing dividends due to minority shareholders. It sometimes happens (as in example in Appendix I) that one of the subsidiaries holds some of the parent company's shares or debenture stock, and in a statement of net assets of subsidiaries alone the shares will necessarily appear as an asset, although in a consolidated balance sheet of the whole undertaking they would be deducted from the issued share or loan capital of the holding company as explained later. If the securities have been acquired at a premium it is advisable, though not always essential, that the premium figure should be treated as goodwill and only the par value shown amongst the assets as has been done in the example. If the total goodwill of subsidiaries is treated as an asset (as in the consolidated balance sheet) and not merely the proportion attributable to the holding company, then it is not necessary to deduct from the minority shareholders' interest the proportion attributable to them as has been done in the example in the Appendix. The only effect of treating it in this way is to vary the total amount apportionable to the minority interests. It does not affect the final result shown by the amalgamated statement. Surplus Assets attributable to Holding Company's Shareholding The balance of the surplus assets represents the proportion thereof pertaining to the shares belonging to the holding company. The difference between this figure and the cost of the shares is made up first of goodwill and secondly of current revenue balances representing any undivided profits (or losses) made since the date on which the shares were acquired and not yet taken up by the holding company. If there are undivided profits the parent company might decide to leave them with the subsidiary companies, but if there are losses as in the example they should be reserved for by the holding company in its balance sheet. The figures in the statements will be more easily followed if reference is made to the corresponding figures in the consolidated balance sheet with which they are of course in agreement. It will also be seen that the amount of the surplus assets including goodwill in the amalgamated statement agrees with the value shown against the items relating to shares in and amounts owing from subsidiary and sub-subsidiary companies in the amended draft legal balance sheet of the holding company, after deducting the indebtedness of the latter to its subsidiary undertakings. The only figures usually published with the holding company's balance sheet are those set out in the last column of the statement. CHAPTER XIII METHOD (IV)—THE LEGAL BALANCE SHEET TOGETHER WITH AN AMALGAMATED OR CONSOLIDATED BALANCE SHEET To publish along with the Holding Company's legal Balance Sheet, as in Method (I), a consolidated Balance Sheet of the whole undertaking, amalgamating the assets and liabilities of the subsidiaries and subsubsidiaries with those of the Holding Company and a consolidated Profit and Loss Account embracing the profits and losses of all the companies. American Conditions In America the consolidated balance sheet is now almost universally adopted by companies whose interests in subsidiary companies form any considerable proportion of their total assets. The practice of issuing such a balance sheet began to spread at the time of the movement for consolidations about the end of last century-a movement which culminated in the formation of the United States Steel Corporation in 1901. The consolidated balance sheet issued by the Corporation has become in a large measure a standard for public corporations in that country. In the first instance the practice had little support except from accountants. For some years the New York Stock Exchange required the filing of balance sheets of every individual company in connection with an application to list securities and either did not insist upon or declined to accept consolidated accounts. For many years now, however, the New York Stock Exchange has laid special stress on the necessity of filing consolidated balance sheets, and, in connection with listing applications in recent years, has called not only for a balance sheet of the parent company as a separate concern but also for a consolidated balance sheet of the whole organization. Once a company's securities have been listed, however, the New York Stock Exchange does not insist on the submission of |