must be set out in the holding company's legal balance sheet separately from its other assets (Section 125).

(c) Amounts owing to subsidiary companies.

The aggregate of any amounts owing to subsidiaries by the holding company must also be shown in the legal balance sheet separately from all the other liabilities (Section 125).

(d) Statement in regard to subsidiary company results.

Under Section 126 (1) of the Act a holding company is required to annex to its legal balance sheet a statement signed by the persons who sign the balance sheet stating how the aggregate profits and losses of subsidiary companies (made up to a date within the period covered by the holding company's accounts) have been dealt with for the purpose of those accounts.

In particular the statement is to show how and to what extent (i) provision has been made for the losses of a subsidiary in the accounts of the subsidiary or the holding company or both, and (ii) subsidiary company losses have been taken into account by the directors of the holding company in arriving at the profits and losses of the holding company as disclosed in its accounts.

The actual amount, however, of the profits or losses of any subsidiary or of any part of such profits or losses dealt with in a particular manner need not be specified.

(e) Qualifications in reports of auditors on balance sheets of

subsidiary companies.

If the report of the auditors on the balance sheet of a subsidiary company is qualified, particulars of the qualification must be given in the statement referred to in (d) above appended to the balance sheet of the holding company (Section 126 (2)).

(f) Where information regarding subsidiaries is not available.

If for any reason the directors of the holding company are unable to obtain the information necessary for the preparation of the statement referred to in (d) above, they are to annex to the balance sheet a statement to that effect (Section 126 (4) ).

(g) Particulars of directors' remuneration.

The total of the amount paid to the directors as remuneration for their services, which under Section 128 of the Act is to be shown in the accounts laid before the company in general meeting (i.e. not necessarily circulated to members unless prescribed by the company's regulations), must include all fees and emoluments paid to or receivable by them by or from any subsidiary company.

Advantages and Disadvantages of Publishing only the Legal Accounts

The presentation of a balance sheet in the legal form enables

the holding company to be viewed as a separate legal entity without complicating the position by the introduction of assets and liabilities of other companies, which although controlled by the holding company are nevertheless conducting business from a legal standpoint as separate concerns.

From the creditors' point of view a balance sheet prepared in this way is essential to enable them to form an opinion of the financial condition of the company against which they would have to proceed if occasion arose.

Again, if the holding company wanted to raise money on debentures or shares with a charge upon its own assets, it would find it necessary to prepare a balance sheet showing its own assets and liabilities alone before an accurate opinion of the security offered could be formed, although it might be supplemented by a statement of the net surplus assets of the associated undertakings.

One of the advantages attaching to the holding company's balance sheet in the separate or legal form is that it is all that is legally necessary for the directors to publish.

Some might say that this is a distinct disadvantage, because directors should be induced to disclose to the members as much information as possible not only in connection with the concern in which they are directly interested but also with the subsidiary companies in which their interest is just as great although it may be indirect. There is no doubt some truth in this but it is also true to say that the legal balance sheet to some extent enables the directors where necessary to avoid the disclosure of vital information to competitors regarding their interest in subsidiary undertakings. Further it allows the equalisation of the income of the parent company from one period to another by the retention of undistributed profits in the accounts of the subsidiaries where such a policy is considered to be desirable and is adopted by the holding company.

There is no doubt that the question of disclosure to competitors is of considerable importance and is often the deciding

factor against any change in the form of the published accounts. Shareholders as a rule are quick to appreciate the dangers attending a too full statement of the affairs of their company and rely to an almost unlimited extent upon the advice tendered to them by the board.

Cases are, however, not unknown where directors have seized on this as an excuse for concealing from the shareholders information to which they might well have access without the affairs of their company being prejudiced in any way. Where information can be given with safety, disclosure is often found to bring advantages to the company. Shareholders have in recent years begun to awaken to their true interests in this matter and have asked for more details, but practice in this country still lags much behind that of the United States of America in the amount of information which is generally published.

In many cases the legal balance sheet, as it used to be seen before the Companies Act, 1929, became operative, did not give sufficient information as to the position of a holding company and its subsidiary undertakings, and even the legal accounts as now prescribed by law are not always drawn up in such a way as to disclose facts which it would be advantageous for the shareholders to know without in any way damaging the interests of the company.

The new legislation has had a considerable remedial effect in this connection in requiring the investments in subsidiary companies to be shown separately and certain explanations to be given by directors in regard to them. It has, however, not altogether recognised the practical nature of the relationship which so often exists between the holding company and its subsidiaries. Inasmuch as the parent concern merely owns the shares in its subsidiaries and not the assets of those concerns, it is difficult, of course, to justify such a recognition on legal grounds, but from a practical business standpoint the parent company does in many cases virtually own and actually control the surplus assets of its subsidiary concerns which the shares represent.

Where outside interests are not prejudiced it is by no means uncommon for the liquid resources of subsidiary companies to be transferred to the parent company in a large organisation this centralisation of finance is often necessary if the advantages of amalgamation are to be realised in full.

From this standpoint, therefore, there is much to be said in favour of amplifying the information supplied in the legal accounts, so as to give an indication of the financial position of the combined enterprise or of the combined subsidiary enterprises viewed as one entity. This should be done in those cases where it is considered by the directors that the legal accounts of the holding company do not in themselves give a full and fair statement of the position, as without such supplementary information the shareholders and creditors might be left in ignorance of the way in which their money was being employed, the profits or losses which subsidiary companies were making, the extent of the financial commitments of subsidiary companies ranking in priority to their own claims and so on.

Shareholdings in Subsidiary Companies-How to be Set Out in Balance Sheet

It will be seen from Section 125 of the 1929 Act that where any of the assets of a company consist of shares in or amounts owing by subsidiary companies, the aggregate amount of those assets (distinguishing shares and indebtedness) must be set out in the balance sheet separately from all other assets.

This is a considerable step in advance of the former practice which many companies followed of grouping investments in subsidiaries with general investments of an essentially different character, and loans or other debts due by subsidiaries were often included with sundry debtors as if they were not of a special nature.

The necessity for the change is clear when the preliminary draft balance sheet of the holding company in Appendix I is considered. Had the investments in War Loans, etc., been

D

included in the balance sheet under the same heading as the investments in subsidiary concerns it would clearly have been misleading if for no other reason than that War Loans are of a readily realisable character probably acquired by way of temporary investment of cash resources whereas investments in subsidiary concerns are not usually held for purposes of re-sale but are intended to be held and used for the purpose of earning profit.

Shareholdings in Subsidiary Companies are generally Fixed Assets

Except in rare cases, such as where a finance company temporarily acquires a controlling interest in another concern which is being disposed of immediately in the ordinary course of its business, or possibly when the assets of the subsidiary concerns are entirely of a current nature, investments in subsidiary companies would generally be regarded as being of the nature of fixed assets.

Section 124 of the Companies Act, 1929, requires a distinction to be made in the balance sheets of all companies between fixed and floating assets and the balance sheet must also show how the values of the fixed assets have been arrived at. In the case of a holding company, except in the rare instances just mentioned, it will therefore generally be necessary to indicate the basis on which the shareholdings in subsidiary companies have been valued for balance sheet purposes. Should no such indication be given it will be inferred that the shareholdings are regarded by the directors as being of the nature of current assets.

Description of Basis of Valuation

A suitable form of wording for stating the basis of valuation is shown in the amended draft legal balance sheet of the holding company set out in Appendix I where the shares are described as at cost less amounts written off," while the state