D1.2 deliverable of the

ESSNet Profiling of large and complex Multinational Enterprise Groups

Guidance Notes to Accompany Checklist (23/03/2011revised from the 03/03 version)

DEFINITIONS

Artificial subsidiary is taken from the SNA and it’s only a way to include in the same paragraph all the useful definitions referable to the ancillary concepts

The reporting unit is “the unit that reports to the survey authority. It reports information for each of the observation units. In certain cases it may correspond to an observation unit”

Legal structure: All legal units constituting the Enterprise group and their mutual relationships in terms of financial and/or controlling links

Operational structure: The organisational structure of the enterprise group for carrying outits economic activities. This structure can be reported in the annual reports of the group.

Introduction

During its first year, the ESSnet on profiling of large and complex Multinational Enterprises Groups (MNE’s) defined a complete feasibility study (WP A) and examined the statistical unit system as object of profiling (WP B). The main results were the definition of the options for international profiling and the introduction of a double view of the statistical unit “enterprise”: the “global enterprise” (GE) derived from the operational segments disclosed by the group itself and the “truncated (national) enterprises” (TE) which are the truncated national parts of a global enterprise. The five options considered were:

A.profile within country using the existing unit enterprise definition (change only for NSI’s that currently do not have a profiling programme);

B.as Option A above but apply standards to each country for profiling (minor change to documentation supporting the SU and BR Regulations);

C.identify the highest level of consolidation of accounts for the enterprise group at the global level. Divide into country clusters of legal units to permit countries to create domestic enterprises according to the existing enterprise definition, the set of domestic enterprises comprising the complete cluster of domestic legal units;

D.profile at the global group level and derive and classify GEs at the global, and TE’s at the national, level centrally by the NSI of the UCI. Pass the TE’s and the list of legal units for each country to the relevant NSI for use as supplied in the national business register and for data collection;

E.create GE’s and collect data centrally and apportion to the national level, where a GE includes activity for more than one country. There would be no link to the legal units other than at the global group cluster level.

The first recommendation contained in the WPA report is “to test the feasibility of Option Dwith further consideration of Option E in two specific cases: for very large, very complex and very internationally integrated (from the process of production point of view) groups, such as aerospace; or when the groups themselves choose to centralise their main surveys”.

Option Dcan bereadby dividing it intofivemain steps:

  1. profile at the global group level centrally by the NSI of the UCI;
  2. derive and classify GE’s at the global level;
  3. derive and classify TE’s at the national level;
  4. list the legal units for each GE per Country (that means list the legal units for each TE),if possible;
  5. pass the TE’s (and, if possible, the lists of legal units) to the relevant NSI for use as supplied in the national business register and for data collection.

N.B: a legal unit can belong to more than one GE or TE (WPA 13.3).

Step 1 Enterprise Group identification and Defining the UCI

  • The first point is to identify the group we aim to profile and to define the scope of the profiling. We need explicit criteria about the control of legal units by the group in terms of financial, legal and organisational links. This can be sourced from the Annual Reports or Annual Consolidated Accounts.

Consider the control definitions and the criteria applied in the EuroGroups Register.

Test the eventual difference between the EGR perimeter and the consolidation ones and evaluate the possible solutions.

  • The UCI needs to be determined in order to allocate the responsibility to the relevant NSI. This may be the same as the unit for which the highest level of consolidation is presented but may be another institutional unit. Describe all units above the level of consolidation and the reason for choosing a specific UCI.

For the UCI determination, apply the “Recommendations Manual - Definition of UCI in the EuroGroups Register” and the “EGR Guidelines on UCI” docs also to test the applicability of the principles established in the EGR.

  • Sub-holding - Business desk profiling tests of the first SGA 2010 (for the WPA) showed situations in which analysing the sub-consolidating reports it is possible to discover more details in terms of GODs and consequently in terms of GEs. Considering the IFRS standards in terms of disclosure a business profiling based on the top level could reach limited results in comparison with the sub-holding information on operating segments. Tests will be useful to better understand how to treat a complex MNE: as a whole or splitting it into several subgroups treated as separate EGs.In most cases sub-holdings will be autonomous operational parts of the global group. If not, then the sub-holding structure as a pure legal structure should be neglected and the EG operational structure should be the basis for the profile[1].
  • Reporting unit - In some cases there will be a different reporting unit from the UCI and the consolidating units and therefore this should be considered if useful for data collection. Reporting units are to be established at the national levels.

Step 2 and 3 - To derive and Classify GE’s at the Global Level and TE’s at the National Level

The IFRS introduces the concept of group operational segments or divisions (GODs) to the group annual reports. These segments of a global group mostly have main elements of autonomy and often have some elements of homogeneity relative to NACE, which criterion is not part of the present definition of the enterprise nor of the proposed one however. The segments may cross national boundaries. The core of the principle is “disclosing information to enable users of the financial statements to evaluate the nature and financial effects of the business activities in which the groups are engaged and the economic environments in which they operates” (Core principle of IFRS 8 - International Accounting Standards Committee Foundation IASCF).

An operating segment is defined as: “A component of an entity:

-that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),

-whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance,

-for which discrete financial information is available.” (IASCF paragraph 5)[2].

The use of these standards is compulsory only for listed companies (stock or bond-traded). The main limits are about the relevance for the disclosure of the operating segments that are strictly linked to quantitative thresholds (see footnote 3).

As underlined in the Feasibility Study “GODs are not statistical units but may be a good basis or starting point in delineating the statistical units for profiling. They have limitations in that they provide only consolidated data that may cross national boundaries because intra-group flows are suppressed. This means that the consolidated data will not be sufficient for statistical purposes, but that there may be a need for more information coming from the accounting information systems, such as information on intra-group flows.” In practice, it will be necessary to go further than the desk approach by organising visits or other contacts with groups.

The definition of enterprise useful for tests is:

“The enterprise is (can be) a single legal unit (including a natural person), an enterprise group as a set of legal units under common control, or a part of an enterprise group, producing goods or services. It benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. The enterprise will mostly appear as an organisational unit that can provide meaningful data for statistics” (WP B report 8.3).

In that way, it is possible to split a single legal unit into different enterprises and to overcome the problem of national boundaries proposing two statistical units:

  • theglobal enterprise (GE) as the statistical division of the global enterprise group
  • thetruncated enterprise (TE) as the national part of the global enterprise.

From WPB report: “The global enterprise may be part of an all-resident enterprise group or be a single legal unit, if it is not part of a set of legal units under common control… Within an all-resident enterprise group, the global enterprise and the truncated enterprise are one and the same unit.”

A GE is an autonomous unit by definition but irrespective of the national boundaries.

A TE is autonomous “significant” within the national boundaries.

It is important to stress that while the (national) enterprise is, and will continue to be, a unit for provision of statistics to Eurostat through the statistical regulations, the GE does not have a counterpart in current regulations (WPA 8.8). At the national level, profiling implies to define a coherent set of national parts of these GE’s for use in data collection by national statistical institutes. The main implication is that the double view, global and national, may suggest the need for a dual classification of TE’s (the global NACE code and the truncated NACE code may be different). The GE should support the good delineation of the TE, which is the main aim of profiling (WPA 8.9).

This will involve collection of information on the legal structure using EGR Data.

Analysis should be carried out focusing on the relationship between the legal structure and the operational structure. If these are not clear, then priority should be given to the organisational structure.

Then collection of information that is already available at the NSI (from business registers, private sourced data or survey data) should be carried out.

Using the Consolidated Financial Accounts/Annual reports:

•If IFRS 8 is followedthe operating divisions as presented in the annual accounts are considered as the starting point for profiling

•describe the possible need and use of other approaches; for example, a limited use of the bottom-up approach mainly due to the limits of IFRS 8 principle[3];

•If IFRS 8 is not followed describe the way the profiling activity was performed: first of all, evaluate the possibility to apply a ‘Top Down’ Approach based on the annual reports; or, if necessary, combining units with:

•the bottom-up approach;

•automatic procedures starting from EGR (or National BR on EGs) Nace codes of each legal unit.

Tests on groups exempted (no IFRS standards) should be useful to test the possibility to adopt a common approach.

If IFRS is followed  the top down-method based on operational segments determined a focus on a set of legal units that may be different from the info of EGR or National BR on EGs. Probably a certain number of pure holdings (mainly in the highest level of the group chain of control) could be out of scope considering the economic/statistical world. In these cases it could be necessary to consider these units deciding whether they could be treated as a “quasi” GE/TE or joined to other GE’s.

Internal activities (mainly auxiliary activities) within the group, such as head office, transport, trading, computing activities and in general the activities of the artificial subsidiaries[4] (owning land, building, equipment or being nominal employer) may be: a) grouped in a distinct (serving) GOD (e.g, operating divisions called “services”, “corporate”, “operations support”, “horizontal activities”, “real estate, holdings and services” and so on); b) allocated to different divisions. This last case (b) is probably the best situation for a profiler: the auxiliary activities (and units) should be totally included in the obtained GEs. On the contrary, in the first case (a) the profiler should test the possibility to apportion the (serving) GOD values to the served GEs describing in details the activities the MNE itself considers as auxiliaries.

Underline situations in which auxiliary affiliates or holdings are located in a different Country than the one of the users.

Make special reference to the treatment of R&D that is conducted for the group as a whole.

The delineation of the reporting and statistical structure of a group is the first expected result of the profiling activity. Especially for the BR it could be possible to test, for example:

  • the reduction in terms of number of enterprises;
  • the main effects in terms of NACE structure of the BR;
  • the potential reduction in terms of surveys questionnaires;
  • the presence of a reporting unit useful as a common data entry point.

The steps to derive GE’s and TE’s may be the following:

  • from the GOD’s to the Global Enterprises (GE’s) (global view);
  • from the GE’s to the Truncated Enterprises (TE’s) (national view).

The delineation should be performed in three steps :

  1. Desk profiling: to understand the global structure of the group and define the global enterprises.
  2. Contact with the group: could allow to better define the global enterprises and the national enterprises and to collect necessary information which is not publicly available :
  3. Understanding (better) of the mission, activities, strategy and organisation of the Group from its own point of view
  4. Structure of the accounting system of the group

c.Legal structure of the group to allocate the legal units to enterprises

d. Possible agreement(s) on the list and names of the enterprise(s) belonging to the Group; and on extra information and/or pro forma data usable to test this list.

  1. Desk analysis (including the use of information received from MNEs after contacting it): to assess if the new definition of enterprises:
  2. is convenient for the collection of statistical data (for both countries of UCI and other countries) through regular existing surveys or through ad hoc data collection.
  3. can support the aggregation of administrative information collected at the level of the legal units (for both countries of UCI and other countries). This aggregation requires some data to be collected at the group level (intra-group flows, for example).

Direct contacts should be focused on:

  • Data availability (Proposed list of variables to be provided at both the GE and TE levels).
  • To discuss the autonomy of the proposed GE’s (and TE’s).
  • To discuss Intra Group Flows between Legal Units or GE’s and TE’s.
  • To discuss the possibility of splitting Global Enterprise Data according to TE’s (include details of how was this achieved).
  • To discuss the Reporting/statistical unit structure.
  • To discuss how the profile will be maintained and the frequency of Visits.

Warning 1: the easiest situation for profiling is: 1 GOD = 1 GE = 1 NACE code for each Country; but the MNEs organisations can be more complex for the presence for example of: “auxiliary” GODs serving other GE’s; a GOD with more than one economic activities; a TE with two main economic activities (belonging to a GE but at national level carrying out two activities). Even if some of these problems should not be treated at this level, but further on, when the Member States will try to use the newly defined enterprises the profiler should carefully describe complex situation. In that way tests could support the production of the methodological paper (WPB and WPC).

Warning 2: About the intra-group flows two different ways to obtain the results are:

  • Managing the intra-group flows inside the NSI (for NSI’s: more job and the need of appropriate skills; for Groups: open their system to NSI’s)
  • Obtaining the values from the Group (new job for the groups: risks for response burden).

Profiling also includes monitoring the main economic variables[5]. Ideally the TE’s would be the unit for statistical surveys but they need to be able to provide the full set of accounts and respect national boundaries. It is possible that the TE’s themselves, comprise of companies that are bounded nationally and that have the ability to provide accounting data for statistical purposes.

If followed, describe the ways MNE’s and NSI’s co-operated to derive GE’s and TE’s for Option E.

Also a limited "global" collection has to be made. The minimum requirement for a GE would be that it can be classified according to its principal activity, be able to provide an estimate of employment and be able either to provide an estimate of turnover (WPA 8.9).

Step 4 – To List the Legal Units for each GE per Country (by Listing the Legal Units for Each TE)

After consultation with the business and the desk research carried out a provisional statistical structure of the MNE should be produced. This which will show the agreed GE’s, TE’s and Legal Units linked to them for the MNE group. If the legal structure deviates from the operational structure, the identification of the GEs and TEs is to be described.