The classification of holding
companies and head offices
Problems encountered by
the ICBS
Prepared by Mrs Noemi Frisch Tsekhman
25 October 2011
1
Content
• Background and definitions in SNA2008
• Problems with the implementation of the
updated definitions
• An example from the Israeli economy
• Conclusions
2
Background and definitions in
SNA2008
Reasons for introducing changes in the
definitions and classification of holding
companies and head offices:
1. Deviation of the ESA95 and the
MFSM 2000 from the SNA1993.
2. Development of the financial markets.
3. Monetary and financial stability analysis.
3
Definitions in SNA2008
4.53 Two quite different types of units exist that are both often referred
to as holding companies. The first is the head office that exercises
some aspects of managerial control over its subsidiaries. These
may sometimes have noticeably fewer employees, and more at a
senior level, than its subsidiaries but it is actively engaged in
production. These types of activities are described in ISIC Rev. 4 in
section M class 7010 as follows:
This class includes the overseeing and managing of other units of
the company or enterprise; undertaking the strategic or
organizational planning and decision making role of the
company or enterprise; exercising operational control and manage
the day-to-day operations of their related units.
Such units are allocated to the non-financial corporations sector
unless all or most of their subsidiaries are financial corporations, in
which case they are treated by convention as financial auxiliaries in
the financial corporations sector.
4
Definitions in SNA2008
4.54 The type of unit properly called a holding company is a unit that
holds the assets of subsidiary corporations but does not undertake
any management activities. They are described in ISIC Rev. 4 in
section K class 6420 as follows:
This class includes the activities of holding companies, i.e. units that
hold the assets (owning controlling-levels of equity) of a group of
subsidiary corporations and whose principal activity is owning the
group. The holding companies in this class do not provide any
other service to the enterprises in which the equity is held, i.e. they
do not administer or manage other units.
Such units are always allocated to the financial corporations sector
and treated as captive financial institutions even if all the subsidiary
corporations are non- financial corporations.”
5
Problems with the
implementation of the definitions
1. What is the level of management control
required for a head office ? Can a holding
company be engaged in financial managing of
the group (issuing bonds, giving loans …) ?
2. What is the level of the decision making role
and the “day to day” operations ?
3. The holding company definition seems very
restrictive.
6
Problems with the
implementation of the definitions
4. Can both kind of companies hold their
subsidiaries and collect management fees?
5. Is the only income of the holding companies
from earnings (losses) from subsidiaries ?
7
Example – IDB Group
Principle companies held by IDB Holdings
100%
55%
60.5%
13.4%
73.5%
63%
8
Example – IDB Group
Some information and quotations from the
financial report :
 IDB Holdings is one of the Israeli largest
holding companies (invests in financial and
non financial companies).
 The owner sets the policy of the Company and
the Group, directs the activity and leads its
business strategy… managing and
supervising on an ongoing basis the activity of
the Company and the Group.
9
Example – IDB Group
 All six companies have a small number of
employees at a senior level.
 Some of the companies share manpower and
some provide management services to the other
companies.
 Structure of the financial accounts:
Assets :
- Investments in investee companies.
- Loans provided to subsidiaries.
10
Example – IDB Group
Liabilities:
- Bonds
- Loans from banks and subsidiaries
Income:
- Net earnings (losses) from investee
companies
- Management fees (small amount).
11
Example – IDB Group
Company
Total assets (annual
report 2010 - stand
alone basis)
Number of
employees (annual
report 2010 - stand
alone basis)
IDB Holdings
0.9 billion US$
A few
IDB Development
2.6 billion US$
51– senior positions
Koor industries
1.8 billion US$
10 - senior positions
Discount investment
3.9 billion US$
33 - senior positions
Clal industries
1.4 billion US$
35 - senior positions
Clal insurance enterprises
holdings
1.3 billion US$
Not available
12
Example – IDB Group
Holding Company or Head Office ?
Holding Company
Head Office
Has no significant production Providing part of the
at its own
management services
The owner of the Group
does not undertake the dayto-day operations at the
enterprise level
The owner of the Group sets
the policy, directs its activity,
leads its business strategy
and manages on an
ongoing basis the activity of
the Company and the Group
The main asset is
investment in investee
companies
Few employees at a senior
level
13
Example – IDB Group
Holding Company or Head Office ?
Holding Company
Head Office
The main income is earnings Issue bonds and provide
loans to the subsidiaries
(losses) from investee
companies
Currently, in the balance sheets, these kind of
companies have been classified as Holding
Companies under the financial sector, in the
“other financial intermediaries” subsector and
will be classified as “captive financial
14
institutions“ according to SNA2008.
A few numbers from the balance sheets
of Israel – financial assets
Total assets of the economy is 1,916 billion US$ (9.4
times GDP in year 2009). The total assets of the financial
sector is 530 billion US$ (28% of the total economy and
36% from the financial assets).
Other financial
Holding
intermediaries Companies as Holding
subsector
part of the
compani
excluding
Other financial
es as
different funds intermediaries
part of
as part of the
subsector
the total
financial sector
excluding
economy
different funds
Year
Financial
sector as
part of the
total
economy
Other financial
intermediaries
subsector as
part of the
financial
sector
2003
40%
24%
9%
80%
2.8%
2008
39%
30%
18%
n.a.
n.a.
Conclusions
 Companies which mainly hold subsidiaries and
engage in some financial activity have been
classified as Holding Companies in the “Captive
financial institution and money lender” subsector
although the owner controls, sets the policy and
makes the decisions for many of the subsidiaries.
 Other statistical agencies may classify differently.
The ambiguity will make it difficult to compare the
data. Therefore, more specific guidance is needed.
 It would be useful to make a sub-classification of the
holding companies (financial and non-financial
holdings)
16
Thank you for your attention !
17