CHAPTER XI METHOD (II)—THE LEGAL BALANCE SHEET To publish the legal Balance Sheet and Profit and Loss Account of the Holding Company as in Method (I) and to present simultaneously the separate legal Balance Sheets and Profit and Loss Accounts of all the subsidiaries. It is not a very common practice to find the accounts of the subsidiary undertakings published along with the holding company's balance sheet. Indeed it would not always be practicable and might in some cases do harm, besides defeating its object by adding to the difficulties of shareholders and others reading the accounts instead of explaining a position perhaps already sufficiently complicated. It is largely a question of numbers of subsidiary undertakings. If there are only two or three it may be useful to publish the balance sheets simultaneously if they admit of some comparison. The best illustration of this method of treatment is that of the large English banks and insurance companies, most, if not all, of which have subsidiary or allied undertakings either in this country or abroad carried on as separate companies whose accounts are in some instances published along with those of the bank or insurance company owning them. There are other companies where a similar procedure is adopted, but they are relatively few in number. Indeed, in the case of the large industrial undertakings where the investments in subsidiaries form a large portion of their total assets and where the number of companies is large, it would serve no useful purpose to publish at the same time a number of separate balance sheets probably drawn up on different bases. As supplementary information these would be unintelligible to the average shareholder and represent to him a confused mass of figures. In such cases the balance sheets of the subsidiary undertakings would probably not be published at all except perhaps to serve some outside purpose such as, in the case of banks, to enable depositors and others to be assured of the stability of the allied undertaking. On the other hand, the presentation of the subsidiary companies' accounts is essential if there are shareholders whose shares have not been acquired by the parent institution. This also applies to debenture-holders. If the subsidiary undertakings are carried on as public, as distinct from private companies, a statement in the form of a balance sheet would in any event have to be filed at Somerset House in the ordinary way. Disclosure of Financial Relationship in Balance Sheets The publication of all the balance sheets at the same time has the advantage of disclosing the financial position of each subsidiary undertaking as a separate legal entity, but unless some essential detail is given showing the financial relationship between the holding company and its subsidiaries, it would hardly serve the purpose intended by the simultaneous publication, which is to give an idea of the financial position of the consolidation as a whole. For example, it would be necessary for the parent company's balance sheet to show in detail the shares held in each constituent undertaking so that it might be seen how much of the total issued capital of each is held. Again, the inter-company balances between the subsidiary companies themselves would require to be set out separately (in addition to the balances between the holding company and its subsidiaries) if they are sufficiently large to be essential to a correct understanding of the real financial position. This might be inconvenient and indeed dangerous for many reasons and especially bearing in mind the possibility of information being given to competitors. With many concerns it will obviously be undesirable for information of this character to be published (as with Subsidiary A. in Appendix I) and it is not likely that this method of presenting the accounts will be adopted in such cases. On the other hand there are many cases where there are no inter-company balances, or where, being very small, they are comparatively unimportant. Consequently the same objection to the presentation of the accounts simultaneously would not apply. Where the accounts are so presented, and information is given of numbers of shares held, it is doubtful if the position can be thoroughly understood unless the connecting link between the cost of the shares and the par value is supplied. For example, the cost will include the amount of any premium paid by the holding company for goodwill and for any surplus profits, etc., in existence at the time. These surpluses will appear in the accounts of the subsidiary undertakings along with profits made since and be available for revenue purposes so far as the subsidiaries are concerned, but in the hands of the parent company they would go to reduce the cost of shares as already pointed out : in short, reserves in a subsidiary company are not necessarily available for dividend for the shareholders of the parent company. Again information would also be necessary as to any surplus or deficiency arising on any revaluation of the properties and whether effect had been given thereto in the subsidiary company's accounts, thereby increasing or decreasing the reserves which so far as the holding company is concerned would be of a capital nature. On the whole the arguments are against the presentation of the accounts in this way. If, however, this method of presenting the additional information to supplement the legal balance sheet is adopted some special adjustments in the subsidiary companies' balance sheets may be called for. Adjustments in Subsidiary Companies' Balance Sheets So long as the constituent undertakings as a whole are making profits and paying dividends and the holding company does not take credit for more than its dividend, no difficulties arise, but the position is different if losses are being made which are provided for by the holding company or if the balance of any undistributed profits is taken credit for. At first sight an adjustment in the accounts of those concerns making losses or having a balance of undistributed profits might seem to be called for, transferring the loss or the balance of profit to the debit or credit of the holding company. If the holding company owns the whole of the share capital there would perhaps be no objection to this. If, however, the holding company does not own the whole of the shares and does not provide for the whole of the loss or take credit for the whole of the profit, but only for its proportion thereof, then an adjustment of the subsidiary company's accounts on the lines indicated above would not make the position any clearer for the reason that the balance then remaining in the subsidiary company's accounts, while theoretically representing the proportion of the loss or profit, as the case may be, attributable to the minority interests would, in effect appear as apportionable to the whole of the capital. Unless, therefore, the whole of any loss made and not merely its due proportion is provided for by the holding company, it would appear unadvisable to adjust the subsidiary company's accounts at all; it would be better to publish them with a note explaining that the holding company has taken care of its proportion of the loss shown. Adjustments are also necessary in respect of the final dividends proposed to be paid by the subsidiary companies, the whole or the due proportion of which has been taken credit for by the parent company. In the balance sheets of the subsidiaries the final dividend should be deducted from the balance of profit and loss account as otherwise profits to the amount of the dividend would appear twice. With many subsidiary concerns no special difficulties present themselves and the accounts can be published in the ordinary way without any adjustments. On the other hand, there are |