18th International Roundtable on Business Survey Frames

Session 6 Globalisation

International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) and Enterprise Groups

Nico WeydertStatec, Luxembourg

Acronyms and context

• International Accounting Standards Board (IASB), based in London, develops accounting standards

• International Financial Reporting Interpretations Committee (IFRIC) a committee of the IASB that helps establishing and improving standards

• IASB publishes standards in a series of pronouncements called International Financial Reporting Standards (IFRSs)

- the IFRIC Interpretations (formerly SIC)- International Accounting Standards (IAS)

• Seventh Directive (Council Directive 83/349) in 1983 on consolidated accounts

• IAS Regulation in 2002 requiring all European Union companies listed on a regular market to use IAS after 2005 (Regulation EC N° 1606/2002)

IAS and Enterprise groups

• Relevant standards (as of 2004):

– IAS 27 was entitled “Consolidated Financial Statements and Accounting for Investments in Subsidiaries” till end 2003, now:

– IAS 27 Consolidated and Separate Financial Statements – SIC 12 on Special Purpose Entities – IAS 28 Accounting for Investment in Associates– IFRS 3 Business Combinations – IAS 24 Related Party Disclosures– IAS 14 Segment Reporting

• Benefits for statisticians?

IAS and Eurostat Recommendations manual: a comparisonIAS Manual

• A group is a parent and all its subsidiaries

• A parent is an entity that has one or more subsidiaries

• A subsidiary is an entity controlled by another entity (parent)

• Control = power to govern the financial and operating policies of an entity

• Enterprise group = set of enterprises controlled by the group head

• group head : parent legal unit not controlled by any other legal unit

• Control = dominant influence over the medium and long-term strategies of one or more other legal units (subsidiaries)

IAS and Eurostat Recommendations manual: a comparisonIAS Manual

• Control presumed to exist when parent owns, directly or indirectly more than half of the voting power of an entity (unless exceptional circumstances)

• For control, the parent unit must be able to influence (directly or indirectly) the decision in ordinary or extraordinary meetings of all the subsidiaries

• Acquisition of an absolute majority (50%+1) of shareholdings with voting rights is the main instrument used to take control

IAS and Eurostat Recommendations manual: a comparisonIAS Manual

• Control might also exist when the parent owns half or less of the voting power of entity e.g. agreement with other investors, or power to appoint or remove the majority of the members of the board of directors

• Take into account potential voting rights that might contribute to control

• A subsidiary is not excluded from consolidation because its business activities are dissimilar

• No consolidation of a subsidiary when control is intended to be temporary (i.e. within 12 months)

• Absolute majority of ownership is neither a necessary nor a sufficient condition to have control:– absenteeism in the

meetings – contracts or agreements

affecting control– shareholdings with limited

voting rights – statutory provisions

• Add majority-controlled units whose accounts are not included by virtue of Seventh Directive

Special Purpose Entities (SPEs)

• Entities that create problems in the business registers• An SPE is an entity created to accomplish a narrow and well-

defined objective (e.g. to effect a lease, research and development activities or as securisation of financial assets)

• From an external point of view they operate in a predetermined way so that no entity has explicit decision-making authority over the SPE’s ongoing activities after its formation (they operate on so-called “autopilot”)

• Mostly 2 categories: Ancillary entities or Financial entities • An SPE should be consolidated when the substance of the

relationship between an enterprise and the SPE indicates control • The major difficulty: detect relations of control

Disclosure Requirements

• Main purpose of IAS is to provide reliable and transparent information from an economic point of view to the public

• In consolidated financial statements the most interesting aspect was in IAS 27.32 version 2000 : A listing of significant subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held

• IAS 27 (December 2003) dropped these disclosure requirements. Provision of disclosure provided in a new version of IAS 24 on Related Party Disclosures, though not with the same clarity

Statistics and Accounting

• Enterprise statistics rely heavily on accounting practices• The Recommendations Manual is right to point out differences with

the Seventh Directive• Differences between the Recommendations Manual and IAS are

fairly small. Therefore compliance with IAS should improve the ease of delineation of enterprise groups in the future, even for not listed companies

• IAS 27.12 provides for exhaustiveness: consolidated financial statements shall include all subsidiaries of the parent!

Arcelor – A Multinational Group in the Steel Industry

• In 2002 Arcelor was created by a merger of Aceralia (Spain), Arbed (Luxembourg) and Usinor (France), three European groups

• Turnover of 26 billion euros in 2003, 98 000 persons occupied in more than 60 countries, crude steel production: 40.2 million tons with a global market share of 14%

• Arcelor’s consolidated financial statements for 2003 were prepared in accordance with IFRS

• Note 31 Listing of Group companies is divided into three parts:– Companies under consolidation scope

• 442 companies fully consolidated (in addition to Arcelor S.A.)• 223 companies consolidated using the equity method

– Non-consolidated related companies (292 companies)– Affiliated companies not consolidated under the equity method

Arcelor (continued)

• Consolidaded group– High number of companies with percentage of capital held is

less than 50% – Difference between majority of ownership and the ability to

control the company

Consolidation method by Percentage of capital held

Percentage of capital held

Total

< 50% > 50%

Equity method 187 36 223 Consolidation method Full consolidation 10 433 443

Total 198 468 666

Arcelor (continued)

• The problem of the equity method• The problem of minor enterprises• Arcelor group in 2003: a set of 958 companies

• Comparison with other IFRS reportings like– Nestlé

– BNP Paribas

– Problems with thresholds used

• IFRS compliance is new for European entreprise groups. How strictly will accounts and auditors stick to the standards?