2.3.3.3 Current floating assets vs. capital assets

A shareholding can be held either as a part of the business activities, or as an investment. Shareholdings that are held as an investment do not form part of the single economic entity. Being a single economic entity implies that there must be a business link between parent and subsidiary: the parent should somehow play a role in the commercial activities of a company, i.e., there should be integration. If a company holds shares in another company only for investment purposes, such a business link does not exist. The investor has no role in the business policy of the company in which they hold shares.1 This also means the activities should not be included in the consolidation at the level of the ultimate parent company.

For shareholdings, a distinction can be made between portfolio investments, trading stock and capital assets. The first two are current floating assets.2 A portfolio investment is holding, e.g., stocks under the expectation that they will increase in value over time. There will generally be a lack of interference with the entity’s activities by the shareholder. Trading stock entails that the investment is purchased with the intention of a short-term gain. A shareholding is held as a capital asset if the intention is to employ it for the benefit of the business enterprise on a continuing basis. Only if a shareholding is held as a capital asset, the interest truly forms part of the economic entity. Thus, only in that case there is a single entity from an economic perspective which requires consolidation.