From this almost line by line comparison it can be seen that concepts of Enterprise groups in the Recommendations manual are very similar to the ones in IAS, which encompasses restrictions of the Seventh Directive. The ¡°substance over form principle¡± of IAS seems to accommodate well the view of the statistician. To a certain extent the statistician only has to know the constituent subsidiaries of the enterprise group. Some requirements on disclosure help in this context. Otherwise IAS requirements are such that the Enterprise group has to have an extensive list of consolidated entities, even if not all are listed in published financial statements. Before turning to disclosure requirements we¡¯ll examine the treatment of Special Purpose Entities in IFRS.

The treatment of Special Purpose Entities (SPEs) ) SIC - 12

An entity may be created to accomplish a narrow and well-defined objective (e.g. to effect a lease, research and development activities or as securisation of financial of financial assets). Very often such entities have very limited decision-making powers (they operate on so-called ¡°autopilot¡±). SIC 12.1

An SPE should be consolidated when the substance of the relationship between an enterprise and the SPE indicates that the SPE is controlled by that enterprise SIC 12.8.

One of the problems of the SPE is the difficulty to detect relations of control between the enterprise and the SPE and the particular role of the latter units.

As says SIC 12.14 SPEs frequently operate in a predetermined way so that no entity has explicit decision-making authority over the SPE¡¯s ongoing activities after its formation (i.e. they operate on ¡°autopilot¡±. (¡­) However, the predetermination of the activities of the SPE through an ¡°autopilot¡± mechanism often provides evidence that the ability to control has been exercised by the party making the predetermination for its own benefit at the formation of the SPE and is being perpetuated.

Appendix (a) of SIC -12 gives following examples from an activity point of view: the SPE is principally engaged in providing a source of long-term capital to an enterprise or funding to support an enterprise¡¯s ongoing major or central operations. The SPE might also provide a supply of goods or services that is consistent with an enterprise¡¯s ongoing major or central operations, which, without the existence of the SPE, would have to be provided by the enterprise itself.

In the first case we have financial units, whereas in the second case we are confronted to ancillary units of a enterprise or an enterprise group, that from a statistical point of view belong to the enterprise or group of enterprises. The use of non-consolidated SPEs to hedge certain Enron investments were one of the major manipulations of Enron, generating profits when needed and hiding assets in other occasions.

We are confronted here with power of SPEs as financial engineering tools for balance sheet and income manipulation, a world where is not always easy to find its way out through a web of complicated financial structures and where even complex regulations cannot prevent actions of villains or transparency for investors or statisticians.

Disclosure aspects for enterprise groups in IAS

One of the main purposes of IAS is to provide reliable and transparent information from an economic point of view to the investor or to the market. Hence a number of disclosures are explicitly foreseen in IAS. Disclosures are sometimes hidden in a non structured text document in published financial statements, but are nevertheless of interest to statisticians.

In consolidated financial statements the most interesting aspect was in version 2000 of IAS 27.32: 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 was to be disclosed.

We shall examine application of such disclosure principles later on, but what strikes at first sight is the fact that the new version of IAS 27 (December 2003) dropped these disclosure requirements for parents and subsidiaries. They reappeared nevertheless somewhere else in a new version of IAS 24 on Related Party Disclosures, though not with the same clarity. 24.12 An entity shall disclose the name of the entity¡¯s parent and, if different, the ultimate controlling party. 24.13 To enable users of financial statements to form a view about the effects of related party relationships on an entity, it is appropriate to disclose the related party relationship when control exists (¡­). In 24.14 there seems to be some contradiction, as it says that the identification of related party relationships between parents and subsidiaries is in addition to the disclosure requirements in IAS 27, IAS 28 and IAS 31, which require an appropriate listing and description of significant investments in subsidiaries, associates and jointly controlled entities. It seems logical to require a listing of significant subsidiaries, when one requires a listing of associates and jointly controlled entities.

In 27.40 (c) IAS requires the disclosure of the relationship between the parent and a subsidiary when the parent does not own more than half of the voting power. In point (d) the reasons why the ownership of more than half of the voting or potential voting power of an investee does not constitute control.

Statistics versus Accounting

The Recommendations manual reads in paragraph 21.42: The statistical concept of the enterprise group is different from the accounting concept as can be derived from the Seventh Council Directive.

A statistical unit known as ¡®enterprise group¡¯ based on the ¡®accounting group¡¯ concept must be defined by applying the following changes:

-          consider group head

-          include those units whose accounts are entirely integrated into those of the consolidating company;

-          add majority-controlled units whose accounts are not included in the overall consolidation by virtue of application of one of the criteria allowed by the Seventh Directive, i.e. difference in the type of activity or small relative size;

-          discount temporary links of less than one year.

These changes were appropriate for the accounting concept according to the Seventh Directive, but the accounting concept according IAS seems to have moved closer to the concepts of statisticians, who often prefer substance over form when analyzing economic entities.

One difference may arise from the exhaustiveness of the statistical concept. The enterprise group according to statisticians is meant to be a census of all entities controlled by the group head. This coincides with IAS 27.12 stating that ¡°Consolidated financial statements shall include all subsidiaries of the parent. Disclosure requirements are less strict and seem to be limited to the significant subsidiaries. In pratice this may lead to some contradiction with the spirit of 27.12. There is a cost of gathering information on fairly small units, which only contribute to a very small percentage to the group¡¯s financial results. Is it statistically relevant to cover the small units? The cost of collecting this information is high at least compared to the results. This was one of the reasons the Seventh Directive excluded them. IAS 27 (2004) and US GAAP seem to be more in line with the statistical concept as they take into consideration all enterprises, whatever their size.

We are here confronted with the incidence of a threshold (when is a subsidiary significant and when is it not?) which might affect comparison of group sizes from a cardinality point of view between countries. It would help if IAS could provide some guidance in this respect.

Arcelor - A Case study

Arcelor, a multinational group in the steel industry, was created by a merger of Aceralia (Spain), Arbed (Luxembourg) and Usinor (France), three European groups that mobilized their technical, industrial, and commercial synergies to create a major player in the steel industry.

Officially launched on February 19, 2001, the merger became effective on February 18, 2002, when the Arcelor share was listed on several stock exchanges. The choice of the name Arcelor was announced on December 12, 2001.

The Arcelor group is developing its activities in 4 core businesses: it is the world's biggest producer of Flat Carbon Steel and Long Carbon Steel, among the leaders in Stainless Steel production, and among the largest firms in Europe for Distribution, Transformation and Trading.

The group¡¯s crude steel production reaches 40.2 million tons

- Flat carbon shipments		25.6 million tons
- Long carbon shipments		12.2 million tons
- Stainless steel shipments		2.4 million tons

turnover 26 billion euros in 2003. It employs 98 000 persons in more than 60 countries and has a global market share of 14%.

Arcelor¡¯s Corporate offices and principal establishment are situated in Luxembourg. Arcelor S.A. is a ¡°Societ¨¦ Anonyme¡± incorporated under Luxembourg Law. Arcelor is registered at the Luxembourg Register of Trade and Commerce. It counts subsidiaries, associates and joint ventures all over the world, even in China, e.g. Baosteel-NSC/Arcelor Automotive Steel Sheets Co., Ltd was launched end of August this year in Shanghai. The Chinese joint-venture between Arcelor, Bao Steel and Nippon Steel Corporation will start production of galvanized steel for automotive and industrial applications in March 2005.

The Arcelor group¡¯s consolidated financial statements for the financial year ending December 31, 2003 were prepared in accordance with IFRS international accounting standards current on that date. Arcelor has adopted a proactive approach in order to anticipate these changes in progress and adapt its accounting policies accordingly.

We shall concentrate on the Notes to the consolidated financial statements and especially on note 31 Listing of Group companies. This listing 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.

The notes give the name of the company, the country and the percentage of capital held by Arcelor. For the consolidated companies (A) it also gives an indication of the consolidation method and a rough indication on economic activity:

Flat Carbon Steel
Long Carbon Steel
Stainless Steel
Distribution, Processing and Trading
Other Activities

What strikes first is the number of companies, one third, in the consolidated scope where the percentage of capital held is less than 50%.

       Consolidation method by Percentage of capital held

		Percentage of capital  held		Total
		< 50%	> 50%
Consolidation method	Equity method	187	36	223
	Full consolidation	10	433	443
Total		198	468	666

We see here the difference between majority of ownership and the ability to control the company. Though there is a clear correlation between the consolidation method and the majority of ownership, Arcelor considers controlling companies independently of the consolidation method. The high number of companies consolidated under the equity method and owned by less than 50% comes from consolidated subgroups. These 9 subgroups referenced in the listing account for 150 companies.

On the other hand we also see that 10 companies owned by less than 50% are fully consolidated. Here we find enterprises controlled by Arcelor though not owned in majority. One example is Paul Wurth, a company from Luxembourg, specialized in the blast furnaces technology and setting up of steel industries. An example in this area is Luoyang: A company producing cooling systems for blast furnaces was established in Luoyang in conjunction with a local copper producer.

Paul Wurth is only owned by 48%, the remaining 52% being owned by 4 banks of Luxembourg. Those banks have no special skill in the domain Paul Wurth is working. Hence Arcelor controls the medium and long term strategy of this company, or subgroup to be more precise. This seems clearly in line with IAS and the Recommendations manual.

As a conclusion one might say that all enterprises in the consolidation scope should be registered as belonging to the enterprise group Arcelor.

The consolidation scope as seen by the enterprise group doesn¡¯t correspond to a rigid definition. At the time of the merger almost all units of the consolidation scope of the 3 groups were added to Arcelor. Shortly afterwards, at the beginning of this year the group decided together with the group auditor to downsize the consolidation scope and to exclude 61 enterprises not significant in their eyes (contribution of less than 0.10 % to the financial statements of the group, less than 0.5% to the net result of the group though this represents 1 million euro). These excluded enterprises will increase the sets of enterprises outside the consolidation scope.

The reference year for these figures is 2003 at a moment where IAS standards were not the same as they are today. In IAS 27 (2004) the equity method is no more allowed in full consolidation. The only two valid methods are at cost or in accordance with IAS 39 Financial Instruments.

For 2003 we face the problem that a certain number of companies are consolidated according to the equity method. Hence it is highly probably that these enterprises will be consolidated by other parents in the same way and consequently we will lose additivity of enterprise groups, one of the criticism of the Recommendations manual of the accounting principle.

A second set of enterprises are those where Arcelor owns a majority of capital but that are not consolidated. Here we find some influence from the Seventh Directive. The 292 enterprises which constitute that set are small enterprises that account for less than 2% in the overall figures of the group. The distribution among countries shows a wide spread, beside Luxembourg, Belgium and Spain:

	Not consolidated majority owned enterprises by country
	Argentina	1		Hungary	3		South Africa	1
	Australia	1		Ireland	1		Spain	5
	Austria	2		Italy	12		Sweden	4
	Belgium	28		Luxembourg	30		Switzerland	5
	Brazil	8		Mexico	1		Tch¨¨quie	3
	Canada	3		Morocco	1		Thaïlande	2
	China	9		Norway	2		The Netherlands	18
	Denmark	4		Poland	4		Turkey	2
	Finland	1		Portugal	3		United Kingdom	20
	France	78		Rumania	3		United States	3
	Germany	31		Singapore	1
	Hong-Kong	1		Slovenia	1		Total	292

Those enterprises are mainly small units with 2 or 3 people occupied working in the field of sales, marketing or engineering. Arcelor finances most of the debts of these companies. The 30 enterprises in Luxembourg, show a fairly small total turnover in 2003. Arcelor says that beside their small size, the cost of integrating those companies is quite high, due to geographical spread and dissimilar data definition and formats used in such small units or that the cost benefit ratio of consolidating is not in favour of consolidation.

From a strict methodological point of view these units should be added to the enterprise group though they don¡¯t enter into the consolidation scope. Although the impact from the cardinality point a view is important, they are not very relevant for economic and even statistical reasons.

A third group of enterprises (74 units) are considered as affiliated companies not consolidated under the equity method. Here Arcelor has an influence since percentage of capital held varies between 20 and 50%. The overall impact of most these enterprises is low, depending nevertheless on countries (Shanghai Baosteel e.g.).

Conclusion

If we apply strictly the recommendations manual and if accept the presentations from an IAS point of view (control), the Arcelor group in 2003 is a set of 958 companies.

Although IAS compliant reporting will increase in the future, it is interesting to consider some other IAS compliant financial reportings and to examine convergence or divergence. We had a look at the figures of the Nestl¨¦ Group and BNP Paribas.

Companies of the Nestl¨¦ Group

Consolidated accounts of the Nestl¨¦ Group present a list of Companies of the Nestl¨¦ group. These companies operate in the food and water sectors, and the pharmaceutical sector. There is a restriction to IAS as in the context of the Swiss Exchange Directive on Information relating to Corporate Governance, the disclosure criteria are:

-          operating companies are disclosed if their sales exceed CHF 10 mio or equivalent,

-          financial companies are disclosed if either their equity exceeds CHF 10 mio or equivalent and/or the total balance sheet is higher than CHF 50 mio or equivalent.

Such as threshold (around 6.7 mio ?) might lead to a loss of a great amount of operating companies. In this respect absence of precision in IAS gives Enterprise groups a fairly large power how to handle disclosure issues.

-          Affiliated companies with full consolidation. Nestl¨¦ doesn¡¯t use equity method for this set of fully consolidated enterprises, unlike Arcelor. Disclosures provided:

-          % capital shareholdings more than 50%, name country, city, capital

-          Affiliated companies with proportionate consolidation (50% of capital shareholdings)

-          equity method

-          Technical assistance R&D

The BNP Paribas Group

High thresholds are also used by this financial group (8 mio ? for the net banking product, 4 mio ? for the EBITDA etc), but the same as Nestl¨¦, Paribas, distinguishes between full consolidation, proportional consolidation and equity, the latter being only used for companies with significant influence.

References

International Financial Reporting Standards incorporating International Accounting Standards and Interpretations London 2004 IASCF Publications Department

Recommendations manual Eurostat

Johan Debruyn: International Accounting Standards (IAS)/ International Financial Reporting Standards (IFRS) Eurostat 2004 - Room document of the Working Group on Business Registers and Statistical Units (Luxembourg 2-4 June 2004)

Deloitte IASplus : www.iasplus.com/standard/ias27.htm

Ernst & Young, Central European Area IFRS Newsletter Issue 2, February 2004

Jean-Pierre Chardonnens: Comptabilit¨¦ des groupes, Editeur: Adoc Treuhand & Consulting AG Cham

PriceWaterHouse Introduction aux normes IAS/IFRS ¨C orientation soci¨¦t¨¦s non financi¨¨res

Financial statements Arcelor, Nestl¨¦, Paribas

       www.arcelor.com

       www.nestle.com

       www.bnpparibas.com