Holding company accounting;

              10 HASKINS & SELLS February
IN a country where industrial expansion
has occurred in unparalleled fashion,
especially in corporate form, and in a
generation which has seen the develop­ment
of the automobile, aeroplane, radio,
etc., until new inventions merely form a
part of the day's news, it is no small won­der
that the rapid growth of the holding
company should be accepted as naturally
as the growth of a single child in a large
family. The many advantages attending
the use of the holding company device,
principally in the functions of manage­ment
and finance, have given this form of
organization a secure place in the indus­trial
world. The chances are it will be
displaced only by a more advantageous
type of business organization; not by legal
restraint. In the public utility field alone
approximately seventy per cent of the
billions of dollars invested in electric, gas,
street and interurban railway companies
is controlled by holding companies and
their subsidiaries.
In contrast to the rather well established
procedure in most phases of corporate
accounting, there is as yet no standard
form of accounting for holding companies.
Operating companies in the public utility
field ordinarily follow lines prescribed by
regulatory bodies; however, pure holding
companies in the utility field may employ
different methods of accounting in pre­paring
their annual reports.
A holding company is a legal entity in
that, in the absence of fraud, a right of
action against a subsidiary company cannot
be enforced against the parent company,
and vice versa. From the legal point of
view, therefore, the balance sheet of the
holding company by itself would suffice.
However, looking beyond the legal fiction
of the separate corporate entities and view­ing
the related companies as a single
organization, it becomes desirable from a
business point of view to have information
in addition to that contained in the bal­ance
sheet of the holding company.
There are three principal methods which
are used to present such information con­cerning
the subsidiaries: (1) to submit
statements of each subsidiary individually;
(2) to submit combined statements of the
holding company and all subsidiaries;
(3) to submit consolidated statements of
the holding company and all subsidiaries.
The first method is feasible only where
the number of subsidiaries is very small.
Advantage lies in the fact that individual
analysis permits of discerning the weak
members of the group. Where there are
many related companies, however, it would
be difficult to visualize the situation as a
whole by viewing a large number of in­dividual
financial statements.
Combined statements of the holding
company and all subsidiaries sometimes
are prepared to show total investments,
but such statements are inclined to be mis­leading.
A combined statement merely
shows the aggregate, without elimination,
of the intercompany balances according to
the individual statements of the related
companies. A consolidated statement in­cludes
the total of the holding company
figures and all subsidiaries with proper
elimination of intercompany items. It is
doubtful as to what proportion of pros­pective
investors are aware of this dis­tinction
between a combined and a con­solidated
statement. In one instance the
combined net income, as exhibited in the
Holding Company Accounting