Essnet Profiling of Large and Complex Multinational Enterprise Groups

in partnership with

FSO

ESSNet Profiling of large and complex Multinational Enterprise Groups

FRAMEWORK PARTNERSHIP AGREEMENT N 30621.2009-2009.470

Specific Grant Agreement N° 30621.2009.001-2010.456

A project funded by theEuropean Union

Final report of the 2nd SGA N° 30621.2009.001-2010.470

for the 13-months period from 25th November 2010 to 24th December 2011.

This report is presented in the name of the ESSnet partnership by

Pierre Teillet, special adviser of the Directeur des Statistiques d’Entreprises de l’INSEE, andcoordinator of this ESSnet.

E-mail:

Information on this ESSnet: CIRCA/Brnet/Profiling

1. Profiling ESSnet: Publishable 2011 Administrative Summary Report.

1.1 The Project objectives

The technical specifications of this ESSnet stipulate that “the profiling ESSnet Project deals with the definition, description and the construction of the enterprises as parts of the MNEs”.

Its main objectives for the four years of its duration are the following:

- one objective achieved in 2010, with the conclusion that profiling is possible and necessitates more studies to be dealt with in the following years:

1. To define the feasibility and the scope of ‘profiling’ large and complex MNEs => achieved in 2010.

-three objectives on which the partners concentrate in this SGA:

1. The development of a common conceptual framework, methodology, rules and standards for 'profiling'.

C1 The development of process descriptions, tools, operational guidelines and quality assurance of profiling.

C2 The development of models for the organisation and financing of 'profiling'.

D Testing and implementing 'profiling'

- one objective to be treated in the following years, in coherence with the new regulation mapping that Eurostat is working on (such as FRIBS project):

E The development of a model for sharing of 'profiles' (including legal framework)

1.2 State of the art

1.2.1 As mentioned in our first summary report, the increasing globalisation of business has heavy consequences on the quality of national and European statistics; it leads to very large deviations between the administrative legal (national) structures and the managerial (real economic) organisation. We concluded that the “large and complex business” data systems, mainly the accounting information system built to produce IFRS account data, directly built at an international scale, are nevertheless the best starting point for global, European and EU+EFTA country statistical measurements.

Following numerous international studies made on the topic on how to look at and see the “whole elephant” (the enterprise group) and to split it, by “profiling”, in economically significant reporting units for statistics, the ESS has included in its 2008-2013 MEETS program three inter-related actions embedded in three ESSnets: EGR, Profiling and Consistency.

1.2.2 In consequence, “Profiling” ESSnet has the aim to provide the EU ESS with methods, guidelines and processes that have been tested and have proved to be workable and feasible.

It is now considered as granted that the resulting Statistical Units – the Global Enterprises (GENs) and the national Truncated Enterprises (TENs) - will be registered in the EGR, theEuropean Groups Register (with the multinational groups themselves, their legal units and the links between them), as the main statistical units for globalisation studies and as the reference unit for all business statistics.

The proposal for updating the BR and the SU regulations for “enterprises” will be built in common by “Profiling” and “Consistency”.

1.2.3 Profiling has confirmed that the generally accepted definition, according to which “profiling consists in analysing the legal, operational and accounting structure of an enterprise group in order to establish the statistical units within that group and their links and the most efficient structure for the collection of statistical data”fits its needs. As said previously, the main sources to fulfil the aims are the Annual Report of the Business, and the related Accounting data, most of the time compliant with IFRS (which are the only fully widespread European standards) combined with direct contacts. The relation with Business officials usually leads to an agreement on the delineation of the enterprise, on the stucture of the group and of the enterprises and on a process for testing the availability of convenient statistical material.

Concerning the methodological aspects, included in the Work Package B, the main actions during 2011, were directed towards:

• the description of the theoretical background on statistical units (enterprise, enterprise group, reporting unit, observation unit, analytical unit), the relationships between units, the core variables (at least: employees, turnover, value added, economic activity, and at best: a complete set of proxies of SBS and National Accounts variables coming from P&L accounts ) and their relevance to consistency, the definition(s) and the use of the concepts of control (UCI ultimate controlling institution vs. GGH global group head), the choice of the country of the ‘decision making centre’, continuity and other ‘coordinating’ characteristics.
• the development of a common operational methodology for profiling that is based on the theoretical foundations and takes into account practical issues like availability of information in different countries.
• the definition of different pragmatic approaches for profiling like top-down and bottom-up, the selection of relevant units (cut-off-criteria).
• the delineation of the non-financial sector (at this stage, profiling will focus on the non-financial sector as far as possible).
• the description of the treatment of specific cases like joint ventures, financial vehicles, holdings, auxiliary activities and units, R&D, SPEs (that have preliminary versions in this year report) and families, funds, foundations, associations, co-operatives etc. (that will be drafted later) and also the treatment necessary to profile the EU truncated part of non EU MNEs.

The preliminary 2011 report includes development on all the previous topics, all of them having been compared to real cases. The WP B final report is scheduled for the end of 2012, after completion and assessment by the new testing countries.

Concerning the “Process/work flows, tools, operational guidelines” (WP C1); (WP C2 related to “quality control for profiling, organisational and financial models” beginning in 2012), the actions of 2011 were mainly related to accumulation of material: each time necessary or usefull a draft paper was written and discussed; the progress report will list them all and organise the detailed outline of the future content. A first preliminary version is due as an input for the training material to be used with future testing countries (March 2012).

Operational examples of the treated topics are the following: Introductory letters and confidentiality declaration by the NSI / How to identify UCI / Visits procedure / Benefits of Visiting over Desk + Telephone Profiling / Core variables in exchange / How to identify SPEs / Description of the exchange and validation process of data between the ESSnet members in the frame of European profiling / How to derivate and identify TENs / EGR update procedure.

Very preliminary examples of treated managerial topics are such: Skills for (global) profiling / Costs/finance model (ONS) / Preliminary specifications of a web platform .

The WP C final report is scheduled for the end of 2013.

Concerning the aspects of testing international profiles (Work Package D),

• the basis was this resulting from the 2010 reports on feasibility:

-a) profile at the global group level and derive and classify GENs at the global, and TENs at the national, level centrally by the NSI of the UCI; pass the TENs 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 (option D);

-b) the introduction of the new definitions of the GENs and TENs

• we made use of a common checklist and of the related guidance defined at the beginning of the testing phase (see deliverables) in which the profiling activity was divided into different steps:

1. identification of the group with the definition of the UCI Country;
2. desk profiling with the main objectives of defining the global structure of the group and drafting a first proposal of statistical structure;
3. direct contacts with the business (including visits) to derive and classify the GENs at global and TENs at the national level;
4. data transmission of the TENs (and the relative lists of legal units) to the relevant NSI.

• We included the methodological developments gathered from the above-cited WP B 2011 report.

• We created templates and further documents necessary for data transmission between partners.

• This resulted on a common work on 23 MNEs (the quantitave objective was 20), but in only 7 fully profiled at the right end of the year, the other necssitating a little more time to be achieved (including 1 or 2 cases for which the cooperation of the MNE will not be obtained). These profiles will be achieved in 2012, in addition to the profiles planned in 2012/2013.

• Nine cases were successfully presented in the joint Rome Workshop (end of November). The feedback from the attendants (BR deciders, survey statisticians and other users as well as present and future profilers) was highly encouraging.

The experience coming from these tests is very complete and generally positive: welcome by the business, cooperation usually high, interest in our approach. The “but “ is mainly related to the “lead time” which is longer than expected and to the right period for common work with MNEs which is short and concentrated in 3 months (April to June if they use calendar as accounting year).

No changes in the fundaments of our project were necessary (or useful) during this year:

This means that our progress confirmed the conclusions of the 1st SGA as well in terms of methodology as in terms of process and tools or in tests.

Perhaps the only “move” would be in the even greater than expected globalisation: e.g we find a lot of “permanent establishments”, perhaps only VAT positions perhaps managing really globalised activities, that are under observation now.

Concerning the future of the ESSnet a complete programme has been developped, including a testing programme, operational dissemination open to 5/6 new testing countries in 2012 and to all other countries of the EU+EFTA in 2013 (on the basis of contracts signed by Eurostat with the new countries for assessing the ESSnet documents, testing as well as UCI as as partnering countries etc).

From a managerial point of view, the present results of the ESSnet suggest the following main characteristics:

-we are proposing a very large change in the approach of business statistics:

• to use an in-depth analysis of the business structure instead od using pre-existing statistical units (founded on legal organization); the SUs must have capabilities for statistical collection;
• to build the statistical units with and to have the agreement of the business themselves: their leading characteristic of “enterprises” being their “autonomy”, this characteristic has to be assessed with and by the headquarters of the group;
• to move from the bottom-up and national description of the SUs to a top-down and global analysis of the business structure; this change does not allow any more each NSI to work independently from the others NSIs of the ESS , but needs an intra-ESS cooperation to list the “right” European and national statistical units; and leads to a network mechanism;
• to operate now a consistent “system of Statistical Units”, the basis of which is the “global enterprise” as part of a “global enterprise group”;
• to “test the ability” of the enterprise to produce structural statistical data (be it coming from administrative ways or from surveying); to do so, it is necessary to dialog with them, in consequence to use their language – the only common and international business language being found in the accounting standards -; to pre-check if our priority variables are available at the “enterprise level” with a sufficient aconomic significance: first at EU level then at national level;
• checking means listing the priority variables we want to observe: this need is commmon to statisticians (are BR common data, SBS variables, FATS needs and NA requests sufficient to test the enterprise abilities?) and to the business representatives (they cannot answer to the ability issue without knowing our fundamental needs!).

This presentation does not mean that we are “naïve”:

-we know that nearly all the information we need does exist at some detailed level in the business information system, but it might not be used and consequently is largely lost in their internal aggregation procedures. So that in a context of wished decrease of the administrative burden, we have to look carely at what kind of information they usely produce and to what more they could agree to produce for us.

- We also know that the IFRS system is not idealistic: we prefer the detailed information and its presentation by nature (with distinction of purchases, staff costs, amortization etc: the primary accounting data); we often find an aggregated presentation by function (costs of sales, distribution costs, administrative costs etc, a secondary accounting construction in which the costs by nature are mixed in the functions and often approximatively apportionned to them). But whithout this starting point, we would not be able to increase the European consistency for the main economic observations …

-we are also proposing large changes in the process: as said before we move towards networking mechanisms to create the structures of the Business Statistics: as the global enterprise we observe, we must become global to analyse the structures, even if we stay national to use them. This means that we increase largely the powers or create the infrastructure we need such as the web platform the specifications of which are being described presently.

Most of this last topic remains a task for the years 2012/2013.

1.3 Partners of the ESSnet

Institut national de la statistique INSEE FR Pierre Teillet ()

et des Etudes économiques (coordinator)

Statistiches Bundesamt DESTATIS DE Roland Sturm ()

Statistics Finland SFI FI Tarja Hattaka ()

Istituto Nazionale di Statistica ISTAT IT Simone Ambroselli ()

Centraal Bureau voor de StatistiekCBS NL Jean Ritzen ()

Office for National Statistics ONS UK Linda Scott ()

Office Fédéral de la Statistique OFS/SFO CH David Ackermann()

Information on this ESSnet: CIRCA/Brnet/Profiling or ESSnet Website

1. Achievement of Project objectives

2.1In administrative terms, the achievements are summarized in the following tables:

Table 0: List of ESSnet objectives, version of 1st SGA (1st year), organised in Work Packages:

Colour code: Black = foreseen; blue = changes during the year

Work package No. / Work package title / Leading
partner
No. / Staff hours / Start / End
/ Realised delivery / Staff hours
realised
WP B / Conceptual framework, methodology, rules ans standards / 2 (CBS) / 1824 / m 1 / m 13 / The preliminary report is approved and is attached to this report / 1034
WP C / Process/work flows, tools, operational guidelines / 2 (CBS) / 1960 / m 1 / m 13 / The progress report is approved ans is attached to this report / 1305
WP D / Testing (and implementation) / 4 (ISTAT) / 4568 / m 1 / m 13 / The progress report is sent apart (because of confidentiality); the test cases are annexes to the progress report / 6594
WP M / Management, administration of the ESSnet / 1 (INSEE) / 1600 / m 1 / m 13 / - 6 progress reports sent (not bi-monthly because much replanification has been done) / 1740
WP Diss / Dissemination / 1 INSEE / 580 / m 3 / m 13 / Presentations at:
-5 conferences including other ESS groups
-9 other EStat WG, SG, DG or non-ESS events / 270
TOTAL / 10532 / 10942

In rough terms, as in the table “0”, the general objectives have been reached; but in details as shown by the table 1, flexibility in organization was the rule.

Table 1: Deliverables List:

Month 1 = December 2010. Colour code: Black = foreseen; blue = changes when realised

DelNo / Deliverable name / WP No. / Leading partner / Nature / Diss
level / Month / Realised
released / Degree of Achievement
D1 / Revised completed version of the “check list” for testing / D / ISTAT /

R

/ CO / 2 / March 2011 (updated version) / Three papers produced on check-lists:
D1.1 Check-list itself
D1.2 Guidance to …
D1.3 Further issues
M1 to M6 / Bi-monthly reports / M / INSEE / R / RE / 2-
extra
4
6
8
10
12 / - Feb released April
- Extra in April / May
- End May
- no ccord meeting
- August released Sept
- Dece
- Jan / - M1 (incl kick-off + 1st & 2nd coord meetings)
- M1 bis (incl 3rd cood meeting)
- M2 (incl 4th coord meeting)
-both replaced by requirement adressed to the ‘EGR system’: M2.1 & Web platform M2.2
- M3 Minutes of Helsinki writing meeting
- M4 Rome coord meeting
-M5 Part of M1 2012 (kick-off of 3rd SGA)
Diss / Conference papers
/ 3rd Workshop / Diss / INSEE/ ISTAT / R / PU / 1 to11 / 25/05/2011
14/09/2011
07/09/2011
27/10/2011
30/11/2011 / - Diss1 profiling presentation to Chinese Business Statisticians
- Diss2 pres to UNECE-OECD-ESTAT experts group on BR
- Diss3 report to BRWG + discussion
- Diss4 presentation ti ESSnet Workshop Köln
- Diss5 Profiling + SU presen-tations to Rome Workshop
C 1 / Minutes First workshop / B, C / ONS/ CBS / R / CO / 3 / 03/03/2011 / - done
B1 / "Summary document" for the 2nd Workshop / B, C / CBS / R / PU / 5 / April/June 2011 / - replaced by work on presentation of cases and issues
B2 / Minutes of the 2nd workshop / B, C / CBS / R / CO / 6 / 29/08/2011 / -done
D2 / “Summary document” for the 3rd Workshop / D / ISTAT / R / CO / 7 / Schedule changed: WS end of Nov; merged with 2 other WSs / The merging of 3 WSs (Consistency/EGR/Profiling )
lead to different preparation (2 prep meetings, ToR for invitees & panelists etc)
M7 / Intermediate cost statement / M /

INSEE

/ R / RE / 9 / 13/07/2011 / - done
D3 / Progress report on testing with an implementation plan on a 2-year period / D / ISTAT / R / PU / 11 / Included in Rome workshop presentations and in the prep of 3rd SGA
M8 / Project plan 2010/2013 follow-up / M / INSEE / R / PU / 11 / Incl in prep of years 2012/13 / - takes care of the 3rd SMBGA + preparation of arrival of new testing countries (2012 & 2013
D4 / Minutes of the 3rd workshop / D / ISTAT / R / CO / 12 / 01/02/2012 / - done
B3 / Intermediate methodological report / B / CBS / R / PU / 13 / 01/02/2012 / - done
C2 / Progress Report on all the issues treated in WPC during the period / C / CBS / R / PU / 13 / 04/02/2012 / - done
D5 / Test reports for completed profiling / D / ISTAT / R / RE / 13 / 31/01/2012 / - done
M9 / Final report and cost statement / M / INSEE / R / RE / 13 / 08/02/2012 / - done

Del No : numbering convention <WP letter>.<number within that WP>: