UNIT V

Accounts of Holding Companies/Parent Companies

5.1 Preparation of consolidated balance sheet with one subsidiary company, Relevant provisions of Accounting Standard: 21(ICAI).

One of the most popular companies in business combinations is by the holding company or parent company. A holding company is a company that directly or indirectly acquires all or more than half of the shares of one or more companies in order to secure a controlling interest in a company called a subsidiary. A holding company can appoint a majority of the directors of a subsidiary and can manage such a company. Holding companies may meet directly from such subsidiaries or acquire a majority or stake in an existing company. Such a company is also considered a subsidiary in which the holding company has acquired a majority stake.

Meaning based on the Companies Act

The Companies Act 2013 defines a subsidiary. A company is a subsidiary of another company only if:

a) Another company controls the composition of the board of directors. Also

b) Other –

i) The first mentioned company has the same voting rights in all respects as the preferred stock holders issued prior to the enforcement of this Act exercise or control more than half of the equity stock holders. If you are an existing company that has voting rights in such a company.

Ii) If the company first mentioned is another company, it holds more than half of the nominal value of its share capital. Also

Iii) The company is a subsidiary of a company that is a subsidiary of another company.

Benefits of a Holding Company

The advantages of a holding company are:

1) The subsidiary maintained its own identity.

2) The general public may be unaware of the existence of combinations between different companies.

3) The holding company does not have to invest the entire amount in the stock capital of the subsidiary and enjoys the control of the subsidiary.

4) Losses can be carried forward for income tax purposes.

5) Since each subsidiary creates its own account, the financial position and profitability of each business are known.

6) The holding company may acquire or dispose of additional shares of the subsidiaries in the market as needed.

Disadvantages of the Holding Company

1)     There is a possibility of unauthorized operation of the account.

2)     Intercompany transactions may not be fair prices.

3)     The interests of minority shareholders may not be properly protected.

4)     Accounting for different companies may be created on different days to manipulate the profits or financial position of group companies.

5)     Shareholders of the holding company may not be aware of the true financial position of the subsidiary.

6)     The creditors of the subsidiary and the shareholders of outsiders may not be aware of the true financial position of the subsidiary.

7)     Subsidiaries may be obliged to appoint persons who have selected a holding company, such as corporate auditors, directors, and other officers, with double high remuneration.

8)     Subsidiaries may force the purchase and sale of commodities, specific assets, etc. at the direction of the holding company.

Presentation of an account by the holding company

As provided in Section (212) of the Companies Act 1956. The holding company must attach a balance sheet. Please present the following documents to our shareholders.

a)     A copy of the subsidiary's balance sheet.

b)    A copy of the subsidiary's income statement.

c)     A copy of the subsidiary's board report.

d)    A copy of the subsidiary's audit report.

e)     A statement indicating the degree of equity of the holding company in the subsidiary at the end of the fiscal year.

f)       When the fiscal year of the subsidiary does not match the fiscal year of the holding company.

Statement indicating the following:

i) Has the holding company's equity in the subsidiary changed since the end of the fiscal year of the subsidiary?

Ii) Details of material changes that occurred during the holding company's fiscal year or the subsidiary's fiscal year.

21 – Financial Statement Integration

21 is effective for accounting periods beginning on or after April 1, that is, accounting periods ending on March 31, 2002. A.S. 21 applies to all companies that prepare consolidated financial statements. Required for listed companies and banking companies.

In accordance with AS 21, the consolidated financial statements include:

i) Profit / Loss A / c

Ii) Balance sheet

Iii) Cash flow statement

Iv) Account notes other than regular notes.

v) Segment report

AS 21 also wants the same import terms and treatments when preparing its consolidated financial statements. Consolidated financial statements must be prepared for both domestic and overseas subsidiaries.

Balance sheet integration

The holding company must present its shareholders with a consolidated balance sheet of the holding company and its subsidiaries. The consolidated balance sheet is nothing more than turning up or combining the balance sheets of the holding company and its subsidiaries. However, assets and liabilities are straightforward. That is, it is added row by row, and the combination of equity capital, reserves, and cumulative losses is not added directly to the consolidated balance sheet.

Creating a Consolidated Balance Sheet.

The following points should be especially noted when creating a consolidated balance sheet.

1) Shares of the holding company and shares of minority shareholders (external shareholders).

2) The dates on the holding company's balance sheet and each subsidiary's balance sheet must be the same. If you don't need that much, you'll need to make some adjustments before integrating.

3) Date of acquisition of control of the subsidiary.

4) Inter-company payment.

5) Revaluation of fixed assets, depreciation, adjustment of revaluation amount, etc. on the acquisition date will be explained later.

Management costs / goodwill / capital reserve

The holding company will acquire more than 50% of the shares of the subsidiary. Such shares may be acquired at market prices. May be premium or discount. This amount will be reflected on the asset's holding company's balance sheet as an investment in the subsidiary's stock. This is the price paid for the shares of net assets as of the acquisition date of the subsidiary. The net assets of a subsidiary consist of equity capital, adjusted earnings and reserves, and cumulative losses as of the acquisition date. If the amount paid by the holding company to the shares of the subsidiary exceeds the proportional shares of the subsidiary's net assets as of the acquisition date, the difference is considered goodwill.

If the net assets of the subsidiary exceed the shares acquired by the holding company and the proportional equity inherent in the costs of the acquired shares, a capital reserve in Favor of the holding company is incurred.

If goodwill already exists on the holding company's balance sheet, or both of the goodwill calculated in this way are added to the existing goodwill. The capital reserve is deducted from the goodwill.

In short, the net amount resulting from goodwill and capital reserves is shown on the consolidated balance sheet.

Minority interest

Claims from external shareholders of a subsidiary must be valued and presented as liabilities on the consolidated balance sheet. Minority interests in a company's net assets are nothing but proportional interests in total, such as equity capital and reserve surplus funds. Proportional interest in all assets should be deducted from minority interests.

Therefore, minority interests are the shares of the following outsiders:

1) Share the equity capital of the subsidiary.

2) Reserve share (both before and after the acquisition of the subsidiary).

3) You need to deduct the share of cumulative loss.

4) Proportional distribution of profit or loss due to asset revaluation.

5) Dividends on preferred stock capital and profits of subsidiaries held by outsiders, if any.

Minority interests mean the interests of outsiders. It is treated as an liability and is presented as a consolidation. Balance sheet as current liabilities. This amount is basically the intrinsic value of the shares held by minority shareholders.

Capital profit and profit

The holding company may acquire the shares of the subsidiary on either the balance sheet date or a date before the balance sheet date. All profits earned by the subsidiary by the date the holding company acquires the shares must be considered capital profit of the holding company.

Such reserves lose an individual's identity and are considered capital gains. If the holding company acquires shares on a day other than the subsidiary's balance sheet date, the holding company's perspective must allocate the subsidiary's profits to capital and earnings. Therefore, the profit earned by the subsidiary before the acquisition date is capital gains, and the profit earned by the subsidiary after the acquisition date is profit. While preparing a share of the consolidated balance sheet of capital income, it must be adjusted at administrative costs and the earnings / reserve should be merged with the holding company's reserve and surplus balances.

Elimination of investment in subsidiary stock

Investing in a subsidiary's stock represents the cost the holding company pays to acquire the subsidiary's stock. Investing in a subsidiary's stock allows the holding company to share the subsidiary's net worth. All assets and l while creating a consolidated balance sheet eliminating the holding company's investment in the subsidiary's stock is logical, as the subsidiary's capabilities must be integrated with the holding company's capabilities. Shares of net assets of external shareholders should be treated as minority interests shown on the holding company's debt-side Balance Sheet.

Mutual debt / intercompany transactions

Holding companies and subsidiaries may engage in multiple intercompany transactions in one or more of the following:

1. A loan from a holding company to a subsidiary, or vice versa.
2. A bill of exchange created by the holding company to a subsidiary or vice versa.
3. The holding company sells or purchases goods with credit from its subsidiaries, or vice versa.
4. Corporate bonds issued by one company may be held by another company.

As a result of these intercompany transactions, certain accounts appear on the holding company and subsidiary balance sheets. On the consolidated balance sheet, you need to delete all these common accounts. For example

1. S Ltd. Received a loan from Rs. H Ltd. From 20,000, then Sltd. The balance sheet shows the liabilities of Rs. H Ltd. 20,000 while the balance sheet is displayed on the assets of Rs. 20,000.
2. H Ltd. Creates an invoice for Rs. When 50,000 is booked at S Ltd. And then H Ltd. Is booked, bills receivable Rs are displayed. Bills payable Rs appear in S Ltd. Books. 50,000.
3. S Ltd. Issued Rs corporate bonds. H Ltd. And S Ltd. The 1,00,000 held on the balance sheet of Rs represents the liability of Rs. H Ltd.'s books show assets of Rs 50,000.

When creating a consolidated balance sheet, you should eliminate all of the above intercompany transactions. These can be done by subtracting intercompany transactions from each item on either side of the balance sheet.

Unrealized Profits

The problem of unrealized profits arises when companies in the same group sell goods to each other for profit and the goods are not yet sold by the company at the end of the year.

When you create a consolidated balance sheet, you need to eliminate unrealized profits from your consolidated balance sheet in the following ways:

1. Unrealized profit must be deducted from the holding company's current earnings.
2. The same amount must be deducted from the shares on the company's consolidated balance sheet. Minority shareholders are not affected by unrealized gains.

For Example

S Ltd. Trading socks contain Rs. 60,000 for items purchased from H Ltd. These items are sold by H Ltd. With a profit of 20% of the invoiced price.

Therefore, unrealized profit = 60,000 x 20/100 = 12,000

Unrealized profit Rs. 12,000 is deducted from the consolidated balance sheet inventory and earnings, that is, the income statement.

Contingent Debt

29 defines Contingent Liability as:

Obligations or past events that arise from past events and whose existence may only be confirmed by the occurrence or non-occurrence of one or more uncertain future events that are not entirely under the control of the entity. Is not recognized as the current obligation / provided.

There are two types of such contingent debt.

a)     External contingent liability.

b)    Internal contingent liability.

Internal contingent liabilities are not shown as footnotes on the consolidated balance sheet because they are related to transactions between the holding company and the subsidiary and appear as actual liabilities on the consolidated balance sheet.

Revaluation of assets and liabilities

The holding company may decide to revalue the assets and liabilities of the subsidiary on the day it acquires the shares of the subsidiary. The gain or loss from such a revaluation is a capital gain or loss.

Before or after the holding company acquires shares, the profits from the revaluation of the assets of the subsidiary must be shared by the holding company and minority shareholders in proportion to their respective holdings. Minority interests must be added to minority interests. However, the holding company's shares are treated as capital gains and should be considered in administrative costs.

Further readjustment of depreciation as the asset value increases must be made in the income statement of the subsidiary. You also need to deduct the same amount from the revenue of the subsidiary.

Subsidiary Preferred Stock

If the subsidiary also holds preferred stock capital, the consolidation will be handled as follows.

a)     The nominal value of the non-participating preferred stock capital of the subsidiary held by the holding company must be adjusted for management costs relative to the cost of the preferred stock.

b)    Preferred stock held by outsiders. The paid-in value of such preferred stock must be included in the minority interests.

Bonus share

The issuance of bonus shares by the subsidiary will increase the number of shares held by the holding company and minority shareholders at no additional cost. However, the ownership ratio does not change. Issuance of bonus shares may or may not affect management costs. Whether such shares are issued from capital income or earnings income.

a) It is necessary to check the profit or loss from the sale of shares and adjust while checking goodwill or capital reserve. Simply put, losses or gains from the sale of such shares should be considered in administrative costs.

b) Minority interests and control costs must be determined based on the number of shares held by the holding company and minority shareholders on the consolidated balance sheet date.

Integrated Profit and Loss Account

The consolidated income statement of the holding company and its subsidiaries is provided to show the operating activities of the companies that make up the group. When you create a consolidated income statement for a holding company and its subsidiaries, you need to aggregate the items that appear in the income statements for the holding company and its subsidiaries.

However, at that time, the following adjustments must be made.

1) Create an income statement in column format. Amounts related to intercompany transactions are entered in the adjustment column for each item and deducted when you enter the amount in the total column.

2) All business transactions between companies, such as buying and selling products and interest on loans between group companies, are excluded.

3) All intercompany profits will be adjusted.

4) Dividends received by the holding company from its subsidiaries must be eliminated from both sides of the consolidated income statement.

5) Interest accrued on the bonds of the subsidiary held by the holding company must be accounted for by both the holding company and the subsidiary and then eliminated.

6) The readjustment of depreciation due to the revaluation of fixed assets at the time of stock acquisition by the holding company must be adjusted on the consolidated balance sheet and each fixed asset and consolidated income statement.

7) Minority interests in the interests of subsidiaries must be transferred to the minority interest account as a percentage of gross profit after adjusting for revaluation of fixed assets and before adjusting for unrealized gains on shares.

8) The holding company's shares in pre-acquisition profit must be transferred to controlling costs in case of acquisition of shares during the year.

9) The holding company's shares in the past acquisition profit are considered to be profit

10) The holding company column balance represents the total profit or loss incurred or incurred across the group.

Foreign subsidiary

The final A / c of the overseas subsidiary should be integrated with other subsidiaries in the usual way. The trial balance of the subsidiary or balance sheet and the profit and loss A / c of the overseas subsidiary are first converted into the local currency.

The conversion rules are the same as for foreign branches, which can be summarized as follows:

a) Fixed assets and fixed liabilities are converted at the exchange rate on the date of payment if such assets were purchased, incurred such liabilities, or acquired or raised after the acquisition of shares. Need to do it.

b) Variable assets and liabilities must be translated at the prevailing exchange rate on the last day of the fiscal year.

c) Revenue items or net income for the year must be translated at the average exchange rate for the period.

d) Beginning shares must be converted at the exchange rate at the beginning of the year.

e) The stock capital and reserves of the subsidiary as of the acquisition date must be converted at the prevailing exchange rate on the acquisition date.

f) Transfers of goods purchased from a holding company by a subsidiary, or vice versa, must be converted at the actual rate on the date of purchase or the date of receipt of the transfer.

g) Fixed assets / liabilities as of the acquisition date carried forward must be converted at the prevailing exchange rate on the acquisition date of the shares. If no fixed asset acquisition date rate is specified.

After converting the various items in the trial balance, you can create a new trial balance. If there is a difference in the new trial balance, you need to transfer it to the Forex variable account. Such differences appear on the balance sheet as assets or liabilities, depending on the debit or credit of the balance. Alternatively, you can transfer the difference in the exchange to your P & L account.

Key takeaways:

1. A holding company is a type of financial institution that owns control of another company, called a subsidiary.
2. The parent company can manage the policies of its subsidiaries and oversee management decisions, but it doesn't perform its day-to-day operations.
3. The holding company is protected from losses incurred by the subsidiary, so if the subsidiary goes bankrupt, its creditors will not be able to chase the holding company.
4. A parent company is a single company that has a dominant stake in one or more other companies.
5. A parent company is formed when a subsidiary is spun off or split, or by an acquisition or merger.
6. The parent company must properly account for its subsidiaries for financial statement and tax purposes.
7. Holdings is the content of an investment portfolio held by an individual or group, such as an investment trust or pension fund.
8. The number and type of holdings in the portfolio contributes to the degree of diversification.
9. Diversification is a risk management strategy that combines different investments within a portfolio. Portfolios built on different types of assets, on average, generate higher long-term returns and reduce the risk of personal holdings or collateral.

Solved examples

Q.1 (Cost of Control / Goodwill)

Balance sheet of S Ltd. As on 31st March 2010 (Liabilities only)

Rs.

On the above date H Ltd. Acquired 30,000 Equity shares in S Ltd. On the above date for Rs. 7,50,000 fixed assets of S Ltd. Were appreciated by Rs. 1,50,000 find out cost of control / Goodwill.

Solution:

Note: Suppose in above case, cost of investment amounted to Rs. 5,00,000 then instead of goodwill, there would be capital Reserve, Rs. 1,00,000.

Q.2 (Minority Interest)

The following is the Balance sheet of S Ltd. As on 31st March, 2010.

H Ltd. Acquired 25,000 shares in S Ltd. On 31st March, 2010 at a cost of Rs. 2,75,000. Fixed assets were revalued at Rs. 3,28,000. Find minority interest.

Solution: Minority interest= 2000/27000 = 2/27

Q.3

The following are summarized Balance Sheets of ‘X’ Ltd. And ‘Y’ Ltd. As on 31st December 2010.

You are required to prepare a consolidated Balance Sheet as on 31st December 2010. Showing in detail necessary adjustments and taking into consideration the following information.

a)      ‘X’ Ltd. Acquired the shares of Y Ltd. On 1.1.2010 when the balance on their profit and Loss account and general reserve were Rs. 75000 and Rs. 80000 respectively.

b)     Stock of Rs. 1,60,000 held by ‘Y’ Ltd. Consists of Rs. 60,000 goods purchased from ‘X’ Ltd. Who has charges profit at 25% on cost.

c)      Included in Debtors of X Ltd. Rs. 30000 due from Y Ltd.

Solution:

Consolidated Balance Sheet of X Ltd. And Y. Ltd. As on 31.12.2010

Notes:

Q.4

H Ltd. Acquired 8,000 shares of Rs. 10 each in K Ltd. On 31st March 2011. The summarized Balance Sheets of the two companies as  on that date were as follows :

You are given the following information:

K Ltd. Made a bonus issue on 31st March 2011 of one share for every two shares held, reducing the capital reserve equivalently, but the transaction is not shown in the above Balance Sheets.

1)     Interest receivable (Rs. 100) in respect of the loan due by H Ltd. To K Ltd. Has not been credited in the account of K Ltd.

2)     The directors decided that the fixed assets of K Ltd. Were overvalued and should be written down by Rs. 5,000.

Prepare the Consolidated Balance Sheet as at 31st March 2011, showing your workings.

Solution:

Consolidated Balance Sheet of K Ltd. And its Subsidiary K Ltd. As at 31st March, 2011

Notes:

Q.5

Following are the balance sheets of H Ltd. And its subsidiary S Ltd., as on 31st December 2010.

1. Profit and loss account of S Ltd. Showed a balance of Rs. 50,000 on 1 January 2010.
2. A divided of 15% was paid in October, 2010 for the year 2009. This dividend was credited to profit and loss account by H Ltd.
3. H. Ltd. Acquired the shares in S Ltd., on 1 July 2010.
4. The bills payable to S. Ltd., were all issued in favour of  H Ltd., which company got the bills discounted.
5. Included in the creditors of S Ltd. Are Rs. 20,000 for goods supplied by H Ltd. Included in the stock of S Ltd. Are goods to the value of Rs. 6,000 which were supplied by H Ltd. At a profit of 33 ⅓% on cost.
6. In arriving at the value of the S Ltd. Shares, the plant and machinery which then stood in the books at Rs. 1,00,000 was revalued at Rs. 1,50,000. The new value was not incorporated in the books. No changes in these assets have been made since that date.

Prepare a Consolidated Balance Sheet of H Ltd. And S Ltd. Show working in detail

Solution:

Consolidated Balance Sheet of H Ltd. And its Subsidiary S Ltd. As at 31st December 2010.

Notes:

Q6. The following are the Profit & Loss A/c of H. Ltd. & S. Ltd. For the year ended March 31st, 2011

You are given following additional information:

a)     H. Ltd. Acquired 3000 Equity shares in S. Ltd. On 1st October 2010, of 4000 Equity shares of S. Ltd. However, Debentures were acquired on 1st April 2009.

b)    During the year H. Ltd. sold goods to S Ltd. Costing 60,000 for

1. 80,000. One fourth of the goods remained unsold on March 31st 2011. It is included in closing stock at cost to S. Ltd.

c)     Commission, rent credited to profit & Loss A/c of H. Ltd. include

1. 40,000, 10,000 received from S. Ltd.

Prepare a consolidated profit and Loss A/c for the year ended March 31st 2011.

Ans. Consolidated profit and Loss A/c of H. Ltd. Its subsidiary

S. Ltd. For year ended March 31st 2011

.

References:

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