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Definition of an investment holding undertaking and a financial holding undertaking for the
purposes of FRS 105
Q. Investment undertakings are excluded from applying FRS 105/micro companies regime. What is
the definition of an investment undertaking with reference to FRS 105?
The term ‘Investment undertakings’ are not defined in Companies Act however it is defined in the
EU Directive 2013/34 which is the basis for the Companies (Accounting) Act 2017 which introduced
the micro companies regime. As the term is not defined in Companies Act, it would be considered
appropriate to refer to the definition in the EU Directive 2013/34.
Definition
The EU Directive defines an investment undertaking as:
(a) undertakings the sole object of which is to invest their funds in various securities, real property
and other assets, with the sole aim of spreading investment risks giving their shareholders the
benefit of the results of the management of their assets,
(b) undertakings associated with investment undertakings with fixed capital, if the sole object of
those associated undertakings is to acquire fully paid shares issued by those investment
undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;
Analysis
1) Firstly looking at the definition of an investment undertakings it is clear:
that the company must be an entity with the sole aim of spreading investment risk AND
must be managed.
Taking these key requirements, it is clear that:
o there would have to be investments in a good number of assets/instruments in
order to be engaged solely in spreading the risk;
o where the assets do not require active management (as opposed to passive
management) then it is unlikely that the company would meet the definition.
o where the investments are in a limited number of investment types then it does not
meet the definition as to have a limited number of investment types would signify
that the entity is not solely managing risk.
o the Company would have to be trading in investments and shares etc. and these
would be shown as current assets as opposed to fixed assets on the balance sheet in
order to come some way close to this definition;
o where a company holds long term investments they are not trading and instead
these are treated as fixed assets as opposed to current assets;
If the entity was trading on a regular basis in a large number of investment types and being actively
managed, then there would be a risk that it would fall into the definition. The author would see
the intention here is the exclusion from FRS 105 would really only be applicable for pure investment
companies.
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Example on the application of the above definition to real life examples:
Example 1: A holding company holding shares in a trading company or trading companies
This may not come within the definition of an investment undertaking as:
the company only has an investment in one class of asset hence it is obvious that the sole
purpose of the company is not to manage investment risk (as all investments are in the same
class and there is only a couple of instruments within that class).
Example 2: A holding company buying and selling shares
This type of company is not as straight forward. The questions to be asked in order to assess if the
company comes within the definition of investment undertakings are as detailed above. The
following considerations are relevant:
if the entity only has one class of asset; shares, this would provide some support for the fact
that it does not come within the definition to some extent as to hold one class of asset
would not infer that it is managed to Spread investment risk which is a requirement of the
definition.
If the investment is in one or a few listed company shares, then there would be no issue as
there is no spreading of risk.
Another supporting argument for not coming within the definition of an investment
undertaking is where the investments are not actively managed, and are held for long term
purposes and included in fixed assets in the balance sheet.
If there is little day to day/regular management of the shares then it may likely fall out of
the definition.
Example 3: Property investment company (i.e. company that holds property and earns rental
income)
Assuming there are not too many properties within the portfolio then this in itself would result in
the company falling out of the definition as holding a small number of properties would hardly
qualify as an investment undertaking. Given the size thresholds for a micro entity it is unlikely that
such an entity would have a significant number of investments in property.
In addition, assuming there are no other investments other than property, then the companies sole
purpose is certainly not to manage risk as the investments are in the same class of assets (hence is
not managing risk).
Conclusion
As is evident above, it is likely that for the vast majority of companies will not come within the
definition of an investment holding undertakings given the narrow scope of the definitions.
However, where there is doubt each entity should review the facts for the company and document
how they are happy that the entity does or does not come within the remit of the definition.
It is possible in limited circumstances that some entities may fall foul of these definitions and
therefore be excluded from applying FRS 105. This is why it is important to assess each company on
a case by case basis.
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Q. A financial holding undertaking is excluded from applying FRS 105/micro companies regime.
What is the definition of a financial holding undertaking with reference to FRS 105?
The term ‘Financial holding undertaking’ is not defined in Companies Act however it is defined in the
EU Directive 2013/34 which is the basis for the Companies (Accounting) Act 2017 which introduced
the micro companies regime. As the term is not defined in Companies Act, it would be considered
appropriate to refer to the definition in the EU Directive 2013/34.
Definition
The EU Directive defines a financial holding undertakings as an undertaking:
‐ the sole object of which is to acquire holdings in other undertakings and to manage such holdings
and turn them to profit, without involving themselves directly or indirectly in the management of
those undertakings, without prejudice to their rights as shareholders;
Analysis
If we dissect this definition into manageable parts, in order for a company to come within the
definition of a holding undertaking the criteria are:
there must be more than one holding as the definition refers to holdings and not holding
singular.; AND
the company must actively manage the lower/subsidiary undertakings. In reality; for the
majority of micro companies, the shareholders of the parent company are also the directors
of the lower/subsidiary company and therefore the same people manage the lower
undertaking which automatically pushes those companies out of the definition of a financial
holding undertaking; AND
the company's sole purpose is that of acquiring holdings in other undertakings (i.e. It does
not hold excess cash on deposit; or does not invest in any other type of asset; or it does not
carry on a trade).
Example on the application of the above definition to real life examples:
Example 1) A holding company holding shares in a trading company or trading companies
A company holding shares in a subsidiary, we believe does not come within the definition as firstly in
relation to a holding undertaking it would only be a holding of one subsidiary where only one
holding is held (as opposed to subsidiaries/associates/undertakings) and secondly even if it has more
than one holding, then the company is actively involved in the management of these subsidiaries
(and therefore is excluded from the definition as the definition makes it clear there should not be
active involvement) assuming the directors and ultimate shareholders are the same in the subsidiary
entity as the holding entity.
Example 2: A holding company buying and selling shares
Assuming these are in listed shares/collective investments or in shares where less than an associate
interest is held it can hardly be considered a holding company as the company has no control over the
lower entity (therefore they are not able to manage such holdings in order to turn it to profit which is
a requirement per the definition). In addition, if the investment is only in one company’s shares then
it would not meet the definition as the holding needs to be in undertakings (plural). If the
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aforementioned facts applied, it is likely that the company would not be excluded from applying FRS
105/micro company regimes.
If the holdings were in excess of an associate interest and there was more than one holding it is likely
that such an entity would come within the definition and therefore excluded from applying FRS 105.
Example 3: Property investment company (i.e. company that holds property and earns rental
income)
Such a company would not be within the definition as the company does not hold shares and
therefore cannot be defined as a holding company.
Conclusion
As is evident above, it is likely that for the vast majority of companies will not come within the
definition of a financial holding undertaking given the narrow scope of the definitions.
However, where there is doubt each entity should review the facts for the company and document
how they are happy that the entity does or does not come within the remit of the definition.
It is possible in limited circumstances that some entities may fall foul of these definitions and
therefore be excluded from applying FRS 105. Therefore, it is important to assess each company on a
case by case basis.
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