Unit -2

Holding company and subsidiary companies

2.1 Holding company and subsidiary companies—Preparation of consolidated P/L Accounts and Balance Sheets.

INTRODUCTION:

In the current phase of economic and business growth, many organisations are growing into large corporations by way of acquisition or mergers. To achieve this objective, formation of holding company is an important tool.

DEFINITIONS:

As per section 2(46) of the Companies Act, 2013, ‘Holding Company’, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Section 2 (87) of the Companies Act, 2013, defines ‘Subsidiary Company’ as a company in which the holding company –

-          controls the composition of the board of directors or

-          exercises or controls more than one half of the total share capital either at its own or together with one or more of its other subsidiary companies.

PURPOSE OF PREPARING CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements (CFS)are the financial statements of a group presented as those of a single enterprise, where a group refers to parent and all its subsidiaries.

The Parent Company need to inform the users of its financial statements, about the financial position and results of operations not only of their enterprise itself but also of the group as a whole. For this purpose, Consolidated Financial Statements are prepared by a parent that is holding enterprise; to provide financial information about a parent and its subsidiary or subsidiaries as a single economic entity.

CFS normally includes Consolidated Balance Sheet, Consolidated Statement of Profit and Loss and Notes and Schedules. Consolidated Cash Flow Statement also needs to be prepared, in case the Holding Company prepares its own Cash Flow Statement.

IN THE SYLLABUS, preparation of Consolidated Balance Sheet and Consolidated Profit and Loss only are included.

Q 1) Given below are the Profit and Loss Accounts of H Ltd and its Subsidiary S Ltd for the year ended on 31st March, 2017.

Other Information:

H Ltd. Sold goods to S Ltd. Of Rs. 120 at cost plus 20%. Inventory of S Ltd. Includes such goods valuing Rs. 24. Administrative expenses of S Ltd. Include Rs. 5 paid to H Ltd. As consultancy fees. Selling and Distribution expenses of H Ltd. Include Rs. 10 paid to S Ltd. As commission.

H Ltd. Holds 80% of equity share capital of Rs. 1000 in S Ltd. Prior to 2015-16. H Ltd. Took credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. For the year 2015-16. Prepare a consolidated Profit and Loss Account.

Solution:                                Consolidated Profit and Loss A/c

Notes to Accounts:

Note No.	Particulars	Amount	Amount
1   2   3   4   5   6   7   8	Revenue from Operations Sales and Other Income H Ltd S Ltd   Less: Inter Company Sales           Consultancy fees received by H from S           Consultancy received by S from H   Increase in Inventory H Ltd S Ltd   Less: Unrealised Profits [(24 x 20) / 120]     Cost of Material purchased/consumed H Ltd S Ltd   Less: Purchase by S Ltd from H Ltd   Direct Expenses (Production) H Ltd S Ltd   Employee Benefit Expense Wages and Salaries H Ltd S Ltd   Other Expenses Administrative Expenses H Ltd S Ltd   Less: Consultancy received byH Ltd fromS Ltd   Selling and Distribution Expenses H Ltd S Ltd   Less: Consultancy received by S Ltd from H Ltd     Finance Costs Interest H Ltd S Ltd   Depreciation and Amortization Expenses H Ltd S Ltd   Provision for Tax H Ltd S Ltd	5000 1000 6000 (120)     (5) (10)   1000 200 1200     (4)   800 200 1000 (120)     200 100   800 150   200 100 300   (5)   200 50 250 (10)   100 50   100 50   1200 200	5865   1196 7061   880   300 1180   950   295   240 535   150   150   1400

Q 2)From the following summarized balance sheets of H Ltd and S Ltd, prepare a consolidated Balance Sheet as on 31st March, 2017.

1. Reserves and Profit and Loss A/c of S Ltd stood at Rs. 25,000 and 15,000 respectively on the date of acquisition of its 80% shares by H Ltd on 1st April, 2016.

2. Machinery (Book Value Rs. 1,00,000) and Furniture (Book Value Rs. 20,000) of S Ltd were revalued at Rs. 1,50,000 and 15,000 respectively on 1st April, 2016 for the purpose of fixing the price of its shares. Rate of Depreciation – Machinery 10%, Furniture 15%.

Summarized Balance Sheet as on 31st March, 2017

Solution:    Consolidated Balance Sheet as on 31st March, 2017

Notes to Accounts:

Working Notes:

Sr. No.	Particulars	Amount
1	Pre-acquisition profits and reserves of S Ltd Reserves Profit and Loss Account   H Ltd : 4/5 x 40,000 Minority’s Interest : 1/5 x 40,000	25,000 15,000 40,000 32,000 8,000
2	Profit on revaluation of assets of S Ltd. Profit on Machinery (1,50,000 – 1,00,000) Less: Loss on Furniture (20,000 – 15,000) Net Profit on revaluation H Ltd : 4/5 x 45,000 Minority’s Interest : 1/5 x 45,000	50,000 5,000 45,000 36,000 9,000
3	Post-acquisition reserves of S Ltd Post-acquisition reserves (Total Reserves less pre-acquisition reserves) H Ltd : 4/5 x 50,000 Minority’s Interest : 1/5 x 50,000	50,000   40,000 10,000
4	Post-acquisition profits of S Ltd Post-acquisition profits (Profit and Loss Account less pre-acquisition profits 25,000-15,000) Add: Excess Depreciation charged on Furniture @ 15%on 5,000 (20,000-15,000)   Less: Under Depreciation on Machinery @ 10% on 50,000 (1,50,000-1,00,000) Adjusted Post-acquisition profits H Ltd : 4/5 x 5,700 Minority’s Interest : 1/5 x 5,750	10,000   750   10,750 5,000   5,750 4,600 1,150
5	Minority Interest Paid up value of 200 shares (1000-800) held by outsiders 200 shares x 100/- Add: 1/5th share of pre-acquisition profits and reserves           1/5th share of profit on revaluation           1/5th share of post-acquisition reserves           1/5th share of post-acquisition profit	20,000   8,000 9,000 10,000 1,150 48,150
6	Cost of Control or Goodwill Price held by H Ltd for 800 shares       (A) Less: Intrinsic Value of the Shares Paid up value of 800 shares held by H Ltd 800 shares x Rs. 100 Add:4/5thshareof pre-acquisition profits and reserves           4/5thshare of profit on revaluation Intrinsic Value of Shares on the Date of Acquisition       (B) Cost of Control or Goodwill (A)-(B)	1,60,000   (80,000) 32,000 36,000 1,48,000 12,000

2.2 Accounts of Banking and Insurance companies

BANKING COMPANY

Banking Regulation Act, 1949 regulates the Banks in India and their activities.

Under Section 5(b) of the said Act defines ‘Banking’ as:

-          Accepting deposits of money from public for the purpose of lending or investing.

-          These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or otherwise.

‘Banking Company’ is defined as – Any bank which transacts the business as stated in Section 5(b) of the Act in India is called a Banking Company.

The Business of Banking Companies:

1)     Borrowing and lending money.

2)     Managing and selling the property which may have come into its possession in satisfaction of claims.

3)     Drawing, Accepting and Discounting bills of exchange, Hindis, promissory notes, debentures and securities.

4)     Granting and issuing of letters of credit and traveller’s cheques.

5)     Buying and selling in bullion.

6)     Buying and selling of foreign exchange including foreign bank notes.

7)     Underwriting shares and debentures.

8)     Providing Safe Deposit Vaults.

9)     Doing all such other things which are incidental for the promotion of banking business.

10) Any other form of business which the Central Government, through Official Gazette may specify.

Reserve Fund:

Every Banking Company, incorporated in India, is required to create and make addition to the Reserve Fund by transferring at least 25% of its profit of every reported year to the Reserve Fund. This transfer is made before declaring any dividend.

Q1) Following are the figures extracted from the books of Top Bank Ltd as on 31.3.2017.

Additional Information:

1) A customer to whom a sum of Rs. 16 lakhs has been advanced has become insolvent and it is expected only 40% can be recovered from his estate.

2) There were also other debts for which a provision of Rs. 2,10,000 was found necessary by the auditors.

3) Rebate on bills discounted on 31.3.2016 was Rs. 19,000 and on 31.3.2017 was Rs. 25,000.

4) Preliminary Expenses are to be fully written off during the year.

5) Provide Rs. 9,00,000 for Income Tax.

6) Profit and Loss A/c Opening Balance was NIL as on 31.3.16.

Prepare the Profit and Loss A/c of the Bank for the year ended 31.3.2017.

Solution:    Top Bank Ltd.

Profit and Loss A/c for the year ended on 31st March, 2017

Schedules:

Working Note 1

INSURANCE COMPANY

Meaning:

Insurance is a contract, where the ‘Insurer’ covers the protection of losses suffered by the ‘Insured’. The Insurance Company is the Insurer and the other party who opts for being protected is called Insured. The consideration in return which the Insured gives to Insurer is called ‘Insurance Premium’. The term of Insurance Contract is termed as Insurance Policy’.

Regulatory Bodies:

The Companies conducting the Insurance Business are regulated by Insurance Regulatory and Development Authority of India Act, 1999. The Act provides framework for the accounting procedures of Insurance Companies.

Also, the Insurance Companies need to abide the Accounting Standards laid down by the Institute of Chartered Accountants of India.

Branches of Insurance Business:

The Insurance Business is broadly divided into two parts, Life Insurance and General Insurance. In academics, Fire and Marine Insurance are majorly taught to the students of Commerce Stream. These two Insurance are part of General Insurance business.

Incomes and Expenditures of Insurance Company:

The major income for any Insurance Company is ‘Premium’. Premium is the amount which the Insured pays to the Insurance Company to safeguard against losses. The other incomes which Insurance Company may generate are – Dividend on Investments, Rent on the properties let out, etc.

The major expenses of an Insurance Company are Claims, and Commission. Besides these, expenses like Annuities, Bonus, Office Expenses, etc. are also incurred.

Books of Accounts:

Insurance Company needs to maintain books of accounts like any other company. But, it is compulsory for them to maintain the following Registers –

-          Register of Policies: Details of Policy holders like Name, Address, Date of Policy, etc.

-          Register of Claims: Name and Address of Claimant, Date of Claims, etc. are included.

-          Register of Licensed Insurance: Name of Insurance Agents, Address, License No., Commission Due to them, etc. and other related details are listed in this Register.

The three registers mentioned above are Statutory Books, that is, the Law governing the Insurance Companies prescribe maintenance of these books. Other than Statutory Books, Subsidiary Books like Cash Book, Premium Register, Cash Receipts, etc. are also maintained.

Q1) From the following balances extracted from the books of Great General Insurance Company Ltd as on 31.3.2011, you are required to prepare Revenue Accounts in respect of Fire and Marine Insurance business for the year ended 31.3.2011 and Profit and Loss Account for the same period:

The following additional points are also to be taken into consideration:

a) Depreciation on Fixed Assets to be provided at 10% p.a.

b) Interest accrued on Investments Rs.10,000.

c) Closing provision for taxation on 31.3.2011 to be maintained at Rs. 1,24,138.

d) Claims Outstanding on 31.3.2011 were Fire Insurance Rs. 10,000; Marine Insurance Rs. 15,000.

e) Premiums Outstanding on 31.3.2011 were Fire Insurance Rs. 30,000; Marine Insurance Rs. 20,000.

f) Reserve for Unexpired Risk to be maintained at 50% and 100% of Net Premium in respect of Fire and Marine Insurance respectively.

g) Expenses of Management due on 31.3.2011 were Rs. 10,000 for Fire Insurance and Rs. 5,000in respect of Marine Insurance.

Solution:                                   Form B – RA (Prescribed by IRDA)

Great General Insurance Co. Ltd

Revenue A/c for the year ended 31st March, 2011

Fire and Marine Insurance Business

Schedules forming part of Revenue A/c

Form B – PL (Prescribed by IRDA)

Great General Insurance Co. Ltd

Profit and Loss A/c for the year ended 31st March, 2011

Working Notes:

4 Reserve for Unexpired Risks is 50% of Net Premium for Fire and 100% of Net Premium for Marine Insurance.

5     Provision for Taxation A/c

2.3 Double Account System -Accounting for Electricity

The double account system is a method of presenting the annual final accounts / annual financial statements of public utility undertakings, like Railways, electricity, gas, water supply, tramways, etc. These undertakings are usually incorporated under special acts and as a result the form of accounts is prescribed by special statute.

Please note that, in India, the accounts of all industrial undertakings, other than Railways and Electric Supply Companies,are prepared as per the Companies Act, 2013.

OBJECTS:

The object of this system is not to show the financial position at a particular date, but to disclose how the capital is being raised and the application of the same, in the acquisition of different fixed assets.

FEATURES:

The main features of double account system are -

1. A public utility undertaking needs a large amount of capital which is invested to purchase fixed assets. So, for fixed assets, fixed liabilities, current assets and current liabilities are to be separately dealt with. Fixed Assets and Fixed Liabilities are recorded in Receipts and Expenditure on Capital Account. Similarly, Current Assets and Current Liabilities are recorded in the General Balance Sheet.

2. Revenue Account is prepared instead of Profit and Loss Account and Net Revenue Account is prepared instead of Profit and Loss Appropriation Account.

3. Normally, no adjustment of assets is made in the Capital Account.

4. Depreciation is not deducted from the Asset, but the same is shown as a liability by way of Fund and as such fixed assets are recorded at book value.

ADVANTAGES and DISADVANTAGES:

The advantages of double account system are -

1. As depreciation fund is compulsorily created and invested in outside the business, it helps to replace an asset without affecting the liquid resources like Cash of the business.

2. The Capital Account helps us to understand the sources of capital in various forms and its utilization in the form of various fixed assets. Thus it can easily be understood by an ordinary person.

Disadvantages of double account system are –

1. Capital Account incorporates the value of an asset, irrespective of its remaining age; which may be very short too. Those assets may realise only scrap value although these are shown at a higher value.

2. Proper distinction between Revenue Expenditure and Capital Expenditure is not possible under the system.

2.4 Gas and Railway Companies

Q 1) Prepare Receipts and Expenditure on Capital A/c, Revenue A/c, Net Revenue A/c and Balance Sheet from the following Trial Balance. Call of Rs. 20 per share was payable on 30th September, 2011 and arrears are subject to interest @ 15% p.a. Provide Depreciation on Building @ 5%, Machinery @ 15%, Mains 20%, Transformers @ 10% and Meters and Electrical Instrument @15%.

Trial Balance in the books of Dynamo Electric Lighting Co. Ltd as on 31.3.12

Solution: Receipts and Expenditure on Capital A/c for the year ended 31st March, 2012

NOTE 1 – Calls in Arrears have been deducted

Revenue Account for the year ended 31st March, 2012

A. Generation      To Coal and Fuel      To Oil, Waste      And Engine room      Stores      To Wages at      Station      To Repairs and      Replacement   B. Distribution   C. Public Lamps   D. Rent, Rates and      Taxes      To Rates and      Taxes   E. Management      Expenses      To Director’s Fee      To Secretary’s      And Manager’s      Salaries      To Stationery,      Printing and      Advertising      To Law and      Incidental      Charges   G. Depreciation      (NOTE 2)      Depreciation on      Buildings      Machinery      Mains      Transformers      Meters      Electrical      Instruments   To Balance c/d to.      Net Revenue A/c	1,90,000   75,000   3,00,000   50,000   1,00,000   1,50,000   60,000   30,000   22,500 1,20,000 65,000 30,000 15,000   5,250	6,15,000   -   -   30,000   3,40,000   2,57,500   2,62,250	By Sale of Energy For Lighting Purposes By Sale of Energy For Power Purposes By Sale of Energy By Contract By Meter Rent		9,75,000   5,00,000 30,000
		15,05,000

NOTE 2: Depreciation on Additions is charged for 6 months.

Net Revenue Account

General Balance Sheet

Liabilities	Amount	Assets	Amount
Capital A/c: Amount Received Sundry Creditors onOpen Accounts Contingencies Reserve   Net Revenue A/c – Balance Provision for Depreciation: Balance as per last Balance Sheet                 6,00,000 Addition during the Year                                  2,57,750                                                       Outstanding Interest on Debentures	39,00,000   1,00,000 1,69,400   40,350   8,57,750   2,10,000	Capital A/c: Amount expended For Works Stores in Hand Sundry Debtors   Interest Due on Calls in Arrears Cash in Hand and Cash at Bank	38,80,000 10,000 5,50,000   7,500 8,30,000

Books recommended:

1. M. C. Shukla and T. S. Grewal —Advanced Account

2. S. M. Shukla —Advanced Accounts.

3. R. L. Gupta —Advanced Accounts.

4. Man Mohan Prasad — Advanced Accounts.

5. S. K. Singh & R. U. Singh —Specialised Accounts