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CHAPTER a
10
ACCOUNTING STANDARDS
FOR CONSOLIDATED
FINANCIAL
STATEMENTS
UNIT 1 ACCOUNTING STATDARD 21
CONSOLIDATED FINANCIAL STATEMENTS
LEARNING OUTCOMES
After studying this chapter, you will be able to:
 Understand the concepts of Group, holding company and subsidiary
company.
 Apply the consolidation procedures for consolidation of financial
statements of subsidiaries with the holding companies.
 Prepare the consolidated financial statements and solve related
problems
© The Institute of Chartered Accountants of India

10.2 ADVANCED ACCOUNTING
UNIT OVERVIEW
Concept of
Purpose and Minority
Group, Components Calculation Elimination of
method of Interests;
Holding of of Goodwill/ Intra-Group
preparing Profit or
Company Consolidated Transactions and
consolidated Capital Loss of
and Financial other
financial Reserve Subsidiary
Subsidiary Statements Adjustments
statements Company
Company
Note: As per the syllabus, the unit covers simple problems on consolidated
financial statements with single subsidiary and excludes problems involving
acquisition of Interest in Subsidiary at Different Dates, Cross holding, Disposal of
a Subsidiary and Foreign Subsidiaries.
1.1 CONCEPT OF GROUP, HOLDING COMPANY

AND SUBSIDIARY COMPANY
In an era of business growth, many organizations are growing into large
corporations by the process of acquisition, mergers, gaining control by one
company over the other company, restructuring etc. Acquisitions and mergers
ultimately lead to either cost reduction or controlling the market or sharing the
material supplies or product diversification or availing tax benefits or synergy.

ACCOUNTING STANDARD FOR CONSOLIDATED 10.3
FINANCIAL STATEMENTS
Whatever the motto behind these ventures is, the ultimate result is the large-scale
corporation. Formation of holding company is the most popular device for
achieving these objectives.
Group of Companies
Many a time, a company expands by keeping intact its separate corporate
identity. In this situation, a company (i.e. holding company) gains control over the
other company (subsidiary company). This control is exercised by one company
over the other by-
1. Purchasing specified number of shares i.e. ownership through voting power

of that company or
2. Exercising control over the board of directors.
The companies connected in these ways are collectively called as a Group of
Companies.
Holding Company and Subsidiary Company have also been defined in Section 2
of the Companies Act, 2013.
Holding company
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.
It may be defined as one, which has one or more subsidiary companies and
enjoys control over them. Legally a holding company and its subsidiaries are
distinct and separate entities. However, in substance holding and subsidiary
companies work as a group. Accordingly, users of holding company’s accounts
need financial information of subsidiaries also to understand the performance
and financial position of the group (i.e. holding company and subsidiaries on a
consolidated basis).
Subsidiary Company
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a
company in which the holding company -
(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at
its own or together with one or more of its subsidiary companies:
A company shall be deemed to be a subsidiary company of the holding company

even if there is indirect control through the subsidiary company (ies).
The control over the composition of a subsidiary company’s Board of Directors
means exercise of power to appoint or remove all or a majority of the directors of
the subsidiary company.
Section 19 of the Companies Act, 2013 prohibits a subsidiary company from
holding shares in the holding company. According to this section, no company
shall, either by itself or through its nominees, hold any shares in its holding
company and no holding company shall allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a company
to its subsidiary company shall be void.
However, a subsidiary may continue to be a member of its holding company
when
(a) the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company; or
(b) the subsidiary company holds such shares as a trustee; or
(c) the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company.
The subsidiary company shall have a right to vote at a meeting of the holding
company only in respect of the shares held by it as a legal representative or as a
trustee, as mentioned above in point (a) and (b).
Applicable Accounting Standard
Accounting Standard (AS) 21: Consolidated Financial Statements provides
guidance on preparation of Consolidated Financial Statements, the purpose of
which is discussed in Para 3 below.
This Standard came into effect in respect of accounting periods commenced on
or after 1-4-2001. AS 21 lays down principles and procedures for preparation and
presentation of consolidated financial statements. Consolidated financial
statements are presented by the parent (holding company) to provide financial

information about the economic activities of the group as a single economic
entity. The parent presenting consolidated financial statements should present
such statements in accordance with this standard but in its separate financial
statements, investments in subsidiaries would be accounted as per AS 13.
1.2 OBJECTIVES OF AS 21
The objective of this Standard is to lay down principles and procedures for
preparation and presentation of consolidated financial statements. Consolidated
Financial Statements are prepared by the holding/parent company to provide
financial information regarding the economic resources controlled by its group
and results achieved with these resources. These consolidated financial
statements are prepared by the parent company in addition to the financial
statement prepared by the parent company for only its own affairs. Hence parent
company prepares two financial statements, one for only its own affairs and one
for taking the whole group as one unit in the form of consolidated financial
statements. Consolidated financial statements usually comprise the following:
▪ Consolidated Balance Sheet
▪ Consolidated Profit & Loss Statement
▪ Notes to Accounts, other statements and explanatory material
▪ Consolidated Cash Flow Statement, if parent company presents its own cash
flow statement.
While preparing the consolidated financial statement, all other ASs and
Accounting Policies will be applicable as they are applied in parent company’s
own financial statements.
A parent which presents consolidated financial statements should consolidate all
subsidiaries, domestic as well as foreign. Where an enterprise does not have a
subsidiary but has an associate and/or a joint venture such an enterprise should
also prepare consolidated financial statements in accordance with Accounting
Standard (AS) 23, Accounting for Associates in Consolidated Financial Statements,
and Accounting Standard (AS) 27, Financial Reporting of Interests in Joint
Ventures respectively.

Definitions as per Accounting Standard (AS) 21

Parent:
A parent is an enterprise that has one or more subsidiaries.
Subsidiary is an enterprise that is controlled by another enterprise (known as the
parent).
Control:
(a) the ownership, directly or indirectly through subsidiary(ies), of more than
one-half of the voting power of an enterprise; or
(b) control of the composition of the board of directors in the case of a
company or of the composition of the corresponding governing body in
case of any other enterprise so as to obtain economic benefits from its
activities.
Group:
A group is a parent and all its subsidiaries.
Minority interest is that part of the net results of operations and of the net
assets of a subsidiary attributable to interests which are not owned, directly or
indirectly through subsidiary(ies), by the parent.
Equity is the residual interest in the assets of an enterprise after deducting all its
liabilities.
Consolidated financial statements are the financial statements of a group
presented as those of a single enterprise.
Circumstances under which Consolidated Financial Statements are
prepared
AS 21 should be applied in the preparation and presentation of consolidated
financial statements for a group of enterprises under the control of a parent.
Consolidated financial statements are the financial statements of a group
presented as those of a single enterprise.
AS 21 does not mandate which enterprises are required to prepare consolidated
financial statements – but specifies the rules to be followed where such financial
statements are prepared.

Consolidated Financial Statements will be prepared by the parent company for all
the companies that are controlled by the parent company either directly or
indirectly, situated in India or abroad except in certain cases.
1.3 WHOLLY OWNED AND PARTLY OWNED

SUBSIDIARIES
S. No. Wholly owned subsidiary Partly owned subsidiary company
company
1. A wholly owned subsidiary In a partly owned subsidiary, all the

company is one in which all shares of subsidiary company are not
the shares are owned by the acquired by the holding company i.e.
holding company. only the majority of shares (i.e., more
than 50%) are owned by the holding
company.
2. 100% voting rights are vested Voting rights of more than 50% but
by the holding company. less than 100% are vested by the
holding company.
3. There is no minority interest There is a minority interest because
because all the shares with less than 50% shares with voting
voting rights are held by the rights are held by outsiders other
holding company. than the holding company.
1.4 PURPOSE OF PREPARING THE

Consolidated financial statements (CFS) are the financial statements of a
‘group’ presented as those of a single enterprise, where a ‘group’ refers to a
parent and all its subsidiaries. Parent company needs to inform the users about
the financial position and results of operations of not only of their enterprise itself
but also of the group as a whole. For this purpose, consolidated financial
statements are prepared and presented by a parent/holding enterprise to provide
financial information about a parent and its subsidiary(ies) as a single economic
entity.

CFS are intended to show the financial position of the group as a whole - by
showing the economic resources controlled by them, by presenting the
obligations of the group and the results the group achieves with its resources.
CFS normally include consolidated balance sheet, consolidated statement of

profit and loss, and notes, other statements and explanatory material that form an
integral part thereof. Consolidated cash flow statement is presented in case a
parent presents its own cash flow statement. The consolidated financial
statements are presented, to the extent possible, in the same format as that
adopted by the parent for its separate financial statements.
The logic for presentation of Consolidated Financial Statements can be

appreciated with the help of an example below :
Assume that you are holding 10 shares of Reliance Industries Limited, one of the
largest conglomerates in India. If you look at Reliance Industries Limited’s
separate (standalone) balance sheet, you can see investments in subsidiaries like
Jio Platforms Limited, Reliance Jio Infocomm Limited, Reliance Retail Limited etc.
Now, if we see the standalone financials of Reliance Industries Limited, the
revenue is generated from Oil & Gas Business. However, we all know that equally
significant for Reliance Industries Limited is the revenue generated from its
subsidiary companies. Further, being a holding company, all operational decisio ns
of the subsidiary companies are taken by Reliance Industries Limited. In other
words, though the holding company and its subsidiaries are legally different
entities, in substance, all the operations of the subsidiaries are merely an
extension of the holding company, and the assets and liabilities of the
subsidiaries are controlled by the holding company.
Technically, Investments appearing in the balance sheet of Reliance Industries

Limited represents proportionate share in the net worth of the respective
subsidiary as well as is also a proportionate share in the profits earned by such
subsidiaries. Accordingly, consolidating the incomes and expenses, as well as the
assets and liabilities of the subsidiary companies with that of the parent company
will result in a better presentation of the operations as well as the financial
position of Reliance Industries Limited.

Relevant provisions of the Companies Act 2013
Where a company has one or more subsidiaries or associate companies, it shall, in
addition to the standalone financial statements, prepare a consolidated financial
statement of the company and of all the subsidiaries and associate companies in
the same form and manner as that of its own and in accordance with applicable
accounting standards, which shall also be laid before the annual general meeting
(AGM) of the company along with the laying of its financial statement.
The company shall also attach along with its financial statement, a separate
statement containing the salient features of the financial statement of its
subsidiary or subsidiaries in Form AOC-1 as per Rule 5 of the Companies
(Accounts) Rules, 2014.
For the purpose of section 129, ‘subsidiary’ includes ‘associate company’ and
‘joint venture’ which means that the company would be required to prepare
consolidated financial statements including associate/ joint venture even if there
is no subsidiary of a company.
The consolidation of financial statements of the company shall be made in

accordance with the provisions of Schedule III of the Companies Act 2013 and the
applicable accounting standards.
In case of a company covered under sub-section (3) of section 129 which is not
required to prepare consolidated financial statements under the Accounting
Standards, it shall be sufficient if the company complies with provisions of
consolidated financial statements provided in Schedule III of the Act.
Exemptions from preparation of CFS:

As per Companies (Accounts) Amendment Rules, 2016, preparation of
consolidated financial statements by a company is not required if it meets the
following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another
company and all its other members, including those not otherwise entitled
to vote, having been intimated in writing and for which the proof of delivery
of such intimation is available with the company, do not object to the
company not presenting consolidated financial statements;

(ii) it is a company whose securities are not listed or are not in the process of
listing on any stock exchange, whether in or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated

financial statements with the Registrar which are in compliance with the
applicable Accounting Standards.
AS21 also lays down the accounting principles and procedures for preparation
and presentation of consolidated financial statements which have been covered in
the later part of this chapter.
It may be pertinent to note that in certain countries outside India, presentation of

standalone financial statements is not mandatory. In fact, it is the preparation and
presentation of consolidated financial statements that are mandatory, given the
reasoning behind Consolidated Financial Statements already discussed in the
example of Reliance Industries Limited above.
In India, the statutory framework (such as the Companies Act, 2013 or the Income
Tax Act, 1961) mandate presentation of standalone financial statements, thereby
making standalone financial statements equally important as consolidated
financial statements.
1.5 SCOPE OF AS 21
1. This Standard should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the
control of a parent.
2. This Standard should also be applied in accounting for investments in
subsidiaries in the separate financial statements of a parent.
3. In the preparation of consolidated financial statements, other Accounting
Standards also apply in the same manner as they apply to the separate
statements.
4. This Standard does not deal with:
a. methods of accounting for amalgamations and their effects on
consolidation, including goodwill arising on amalgamation (see AS 14,
Accounting for Amalgamations);

b. accounting for investments in associates (governed by AS 13,
Accounting for Investments); and
c. accounting for investments in joint ventures (governed by AS 13,

Accounting for Investments).
Note: AS 21 is mandatory if an enterprise presents consolidated financial

statements. In other words, the accounting standard does not mandate an
enterprise to present consolidated financial statements but, if the enterprise
presents consolidated financial statements for complying with the requirements
of any statute or otherwise, it should prepare and present consolidated financial
statements in accordance with AS 21.
1.6 CONTROL
The consolidated financial statements are prepared on the basis of financial
statements of parent and all enterprises that are controlled by the parent, other
than those subsidiaries excluded for the reasons set out in paragraph 11 of AS 21.
Control exists when the parent owns, directly or indirectly through subsidiary(ies),
more than one-half of the voting power of an enterprise. Control also exists when
an enterprise controls the composition of the board of directors (in the case of a
company) or of the corresponding governing body (in case of an enterprise not
being a company) so as to obtain economic benefits from its activities.
An enterprise may control the composition of the governing bodies of entities

such as gratuity trust, provident fund trust etc. Since the objective of control over
such entities is not to obtain economic benefits from their activities, these are not
considered for the purpose of preparation of consolidated financial statements.
For the purpose of this Standard, an enterprise is considered to control the

composition of
(i) the board of directors of a company, if it has the power, without the
consent or concurrence of any other person, to appoint or remove all or a
majority of directors of that company. An enterprise is deemed to have the
power to appoint a director, if any of the following conditions is satisfied:

a. a person cannot be appointed as director without the exercise in his

favour by that enterprise of such a power as aforesaid; or
b. a person’s appointment as director follows necessarily from his

appointment to a position held by him in that enterprise; or
c. the director is nominated by that enterprise or a subsidiary thereof.
(ii) the governing body of an enterprise that is not a company, if it has the
power, without the consent or the concurrence of any other person, to
appoint or remove all or a majority of members of the governing body of
that other enterprise. An enterprise is deemed to have the power to appoint
a member, if any of the following conditions is satisfied:
a. a person cannot be appointed as member of the governing body

without the exercise in his favour by that other enterprise of such a
power as aforesaid; or
b. a person’s appointment as member of the governing body follows

necessarily from his appointment to a position held by him in that
other enterprise; or
c. the member of the governing body is nominated by that other

enterprise.
Note: It is possible that an enterprise is controlled by two enterprises – one

controls by virtue of ownership of majority of the voting power of that enterprise
and the other controls, by virtue of an agreement or otherwise, the composition
of the board of directors so as to obtain economic benefits from its activities. In
such a rare situation, when an enterprise is controlled by two enterprises as per
the definition of ‘control’, the first mentioned enterprise will be considered as
subsidiary of both the controlling enterprises within the meaning of AS 21 and,
therefore, both the enterprises need to consolidate the financial statements o f
that enterprise.

1.7 EXCLUSION FROM PREPARATION OF

As per AS 21, a subsidiary should be excluded from consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired

and held exclusively with a view to its subsequent disposal in the near
future; or
(b) it operates under severe long-term restrictions which significantly impair
its ability to transfer funds to the parent.
In consolidated financial statements, investments in such subsidiaries should be
accounted for in accordance with AS 13 ‘Accounting for Investments’. The reasons
for not consolidating a subsidiary should be disclosed in the consolidated
financial statements.
Where an enterprise owns majority of voting power by virtue of ownership of the
shares of another enterprise and all the shares are held as ‘stock-in-trade’ and are
acquired and held exclusively with a view to their subsequent disposal in the near
future, the control by the first mentioned enterprise is considered to be
temporary. It would be pertinent to note that merely holding all the shares as
'stock-in-trade', is not sufficient to be considered as temporary control. It is only
when all the shares held as 'stock-in-trade' are acquired and held exclusively with
a view to their subsequent disposal in the near future, that control would be
considered to be temporary within the meaning of point (a) above.
The period of time, which is considered as “near future” as mentioned above,

primarily depends on the facts and circumstances of each case. However,
ordinarily, the meaning of the words ‘near future’ is considered as not more than
twelve months from acquisition of relevant investments unless a longer period
can be justified on the basis of facts and circumstances of the case. The intention
with regard to disposal of the relevant investment is considered at the time of
acquisition of the investment. Accordingly if the relevant investment is acquired
without an intention to its subsequent disposal in near future, and subsequently,
it is decided to dispose off the investments, such an investment is not excluded
from consolidation, until the investment is actually disposed off.

Conversely, if the relevant investment is acquired with an intention to its

subsequent disposal in near future, but, due to some valid reasons, it could not
be disposed off within that period, the same will continue to be excluded from
consolidation, provided there is no change in the intention.
Exclusion of a subsidiary from consolidation on the ground that its business
activities are dissimilar from those of the other enterprises within the group is not
justified because better information is provided by consolidating such subsidiaries
and disclosing additional information in the consolidated financial statements
about the different business activities of subsidiaries. Extending the above
Reliance Industries Limited example, though the parent company is in the Oil and
Gas Business, and its subsidiaries operate in industries such as telecom, retail
trade, fashion and lifestyle, media etc., all the entities have to be consolidated as
such consolidated financial statements will then provide better picture of the
business and financial position of Reliance Industries Limited. For example, the
disclosures required by AS 17 ‘Segment Reporting’, help to explain the
significance of different business activities within the group.
Consolidation of a subsidiary which is a Limited Liability Partnership (LLP) or
a Partnership Firm
As per rule 6 of Companies (Accounts) Rules, 2014, under the heading ‘Manner of
consolidation of accounts’ it is provided that consolidation of financial statements
of a company shall be done in accordance with the provisions of Schedule III to
the Companies Act, 2013 and the applicable Accounting Standards.
It is noted that relevant Indian Accounting Standard i.e., Ind AS 110, Consolidated
Financial Statements provides that where an entity has control on one or more
other entities, the controlling entity is required to consolidate all the controlled
entities. Since, the word ‘entity’ includes a company as well as any other form of
entity, therefore, LLPs and partnership firms are required to be consolidated.
Similarly, under Accounting Standard (AS) 21, as per the definition of subsidiary,
an enterprise controlled by the parent is required to be consolidated. The term
‘enterprise’ includes a company and any enterprise other than a company.
Therefore, under AS also, LLPs and partnership firms are required to be
consolidated.
Accordingly, in the given case, holding company is required to consolidate its
subsidiary which is an LLP or a partnership firm.

Consolidation of Limited Liability Partnership (LLP) which is an Associate or
Joint Venture
If LLP or a partnership firm is an associate or joint venture of holding company,
even then the LLP and the partnership firm need to be consolidated in
accordance with the requirements of applicable Accounting Standards.
1.8 ADVANTAGES OF CONSOLIDATED

Acquisition
of
Subsidiary
Evaluation
Single Advantages of of Holding
Source
Document Consolidation Company in
the market
Intrinsic
value of
share
The main advantages of consolidation are given below:
(i) Single source document: From the consolidated financial statements, the
users of accounts can get an overall picture of the Group (i.e. holding
company and its subsidiaries). Consolidated profit and loss account gives
the overall profitability of the group.
(ii) Intrinsic value of share: Intrinsic share value of the holding company can
be calculated directly from the Consolidated Balance Sheet.
(iii) Acquisition of subsidiary: The minority interest data of the consolidated

financial statement indicates that the amount payable to the outside
shareholders of the subsidiary company at book value which is used as the

starting point of bargaining at the time of acquisition of a subsidiary by the

holding company.
(iv) Evaluation of holding company in the market: The overall financial health
of the holding company can be judged using consolidated financial
statements. Those who want to invest in the shares of the holding company
or acquire it, need such consolidated statement for evaluation.
1.9 COMPONENTS OF CONSOLIDATED

As per AS 21, consolidated financial statements normally include the following:
Consolidated Balance Sheet

consolidated financial
Consolidated Statement of
statements
Profit and Loss Account
Consolidated Cash Flow

Statement (in case parent
presents cash flow statement)
Notes and statements and

explanatory schedules
 The consolidated financial statements are presented to the extent possible

in the same format as that adopted by the parent for its separate financial
statements.
All the notes appearing in the separate financial statements of the parent
enterprise and its subsidiaries need not be included in the notes to the
consolidated financial statement. For preparing consolidated financial statements,
the following principles may be observed in respect of notes and other
explanatory material that form an integral part thereof:

(a) Notes which are necessary for presenting a true and fair view of the
consolidated financial statements are included in the consolidated financial
statements as an integral part thereof.
(b) Only the notes involving items which are material need to be disclosed.
Materiality for this purpose is assessed in relation to the information
contained in consolidated financial statements. In view of this, it is possible
that certain notes which are disclosed in separate financial statements of a
parent or a subsidiary would not be required to be disclosed in the
consolidated financial statements when the test of materiality is applied in
the context of consolidated financial statements.
(c) Additional statutory information disclosed in separate financial statements
of the subsidiary and/or a parent having no bearing on the true and fair
view of the consolidated financial statements need not be disclosed in the
consolidated financial statements.
In addition, the consolidated financial statements shall disclose the information as

per the requirements specified in the applicable Accounting Standards including
the following as per the requirements of Schedule III to the Companies Act, 2013
which contains the ‘General Instructions for Preparation of Consolidated Financial
Statements’:
(i) Profit or loss attributable to “minority interest” and to owners of the parent
in the statement of profit and loss shall be presented as allocation for the
period.
(ii) “Minority interests” in the balance sheet within equity shall be presented
separately from the equity of the owners of the parent.
Students are also advised to refer the Schedule III to the Companies Act, 2013.
It may be noted that companies do not maintain any separate set of journal
entries for ‘Consolidated Set of Accounts’. Continuing the example of Reliance
Industries Limited, Consolidated Financial Statements of Reliance Industries
Limited is not based on “double entry book-keeping in the ‘group books of
accounts’”, as there is no concept of ‘group books of accounts’. Practically,
Consolidated Financial Statements are prepared from the separate / standalone
financial statements of each entity (parent / subsidiary) to which consolidation
adjustments are made in accordance with AS 21. Accordingly, the financial

statements of each entity are finalized in accordance with the applicable

Accounting Standards, and based on such financial statements, consolidation
procedures are performed in accordance with AS 21.
1.10 CONSOLIDATION PROCEDURES

Rule 6 of the Companies (Accounts) Rules, 2014 states that the manner of
consolidation of financial statements of the company shall be in accordance with
the provisions of Schedule III of the Act and the applicable accounting standards.
AS 21, lays down the procedure for consolidation of financial statements of the
companies within the group.
When preparing consolidated financial statements, the individual balances of the
parent and its subsidiaries are combined or consolidated on a line-by-line basis,
and then certain consolidation adjustments are made.
For example, the cash, trade receivables and prepayments of the parent and each
subsidiary are added together to arrive at the cash, trade receivables and
prepayments of the group, before consolidation adjustments are made.
The objective is that the consolidated financial statements should present the
information contained in the consolidated financial statements of a parent and its
subsidiaries as if they were the financial statements of a single economic entity.
The various steps involved in the consolidation process are as follows:
1. the cost to the parent of its investment (cost of acquisition) in each
subsidiary and the parent’s portion of equity of each subsidiary (acquirer’s
interest), at the date on which investment in each subsidiary is made, should
be eliminated. In case, cost of acquisition exceeds or is less than the
acquirer’s interest, at the date on which investment in the subsidiary is
made, goodwill or capital reserve should be recognized respectively in the
CFS.
2. intragroup transactions, including sales, expenses and dividends, are

eliminated, in full;
3. Adjustments in respect of unrealised profits/ losses should be made;
4. minority interest in the net income of consolidated subsidiaries for the

reporting period are identified and adjusted against the income of the

group in order to arrive at the net income attributable to the owners of the
parent; and
5. minority interests in the net assets of consolidated subsidiaries should be

identified and presented in the consolidated balance sheet separately from
liabilities and the equity of the parent’s shareholders. Minority interests in
the net assets consist of:
(i) the amount of equity attributable to minorities at the date on which
investment in a subsidiary is made; and
(ii) the minorities share of movements in equity since the date the parent-
subsidiary relationship came in existence.
Note: Where the carrying amount of the investment in the subsidiary is

different from its cost, the carrying amount is considered for the purpose of
above computations.
6. The results of operations of a subsidiary are included in the CFS as from the
date on which parent-subsidiary relationship came in existence.
The results of operations of a subsidiary with which parent-subsidiary
relationship ceases to exist are included in the consolidated statement of
profit and loss until the date of cessation of the relationship.
The difference between the proceeds from the disposal of investment in a
subsidiary and the carrying amount of its assets less liabilities as of the date
of disposal is recognised in the consolidated statement of profit and loss as
the profit or loss on the disposal of the investment in the subsidiary.
In order to ensure the comparability of the financial statements from one
accounting period to the next, supplementary information is often provided
about the effect of the acquisition and disposal of subsidiaries on the
financial position at the reporting date and the results for the reporting
period and on the corresponding amounts for the preceding period.
7. An investment in an enterprise should be accounted for in accordance with
AS 13, Accounting for Investments, from the date that the enterprise ceases
to be a subsidiary and does not become an associate.

8. The carrying amount of the investment at the date that it ceases to be a

subsidiary is regarded as cost thereafter.
Thus, Consolidation Adjustments are broadly categorized as under:
Consolidation Adjustments
MAJOR ADJUSTMENTS INTRA-GROUP ADJUSTMENTS

Those which 'drive' the double entry: 1. Intra-group balances
1. Goodwill / Capital Reserve (i.e., 2. Unrealized profit
cost of Control) 3. Inventory
2. Minority Interests 4. Non-Current Asset transfers
3. Consolidated Reserves 5. Minority Interests
4. Disposal of Subsidiary*
* Disposal of Subsidiary is not examined at the Intermediate Level.
1.11. CALCULATION OF GOODWILL/CAPITAL

RESERVE (COST OF CONTROL)
As on the date of investment, the cost of investment and the equity in the
subsidiary needs to be calculated.
Equity is defined as the ‘residual interest in the assets of an enterprise after

deducting all its liabilities.’ In other words, it is equal to the net worth of the
enterprise.
Once the above is calculated, goodwill or capital reserve is calculated as under:
Goodwill = Cost of Investment - Parent’s share in the equity of the

subsidiary on date of investment
Capital Reserve = Parent’s share in the equity of the subsidiary on date of

investment – Cost of investment

The parent’s portion of equity in a subsidiary, at the date on which investment is
made, is determined on the basis of information contained in the financial
statements of the subsidiary as on the date of investment.
However, if the financial statements of a subsidiary as on the date of investment
are not available and if it is impracticable to draw the financial statements of the
subsidiary as on that date, financial statements of the subsidiary for the
immediately preceding period are used as a basis for consolidation.
Adjustments are made to these financial statements for the effects of significant
transactions or other events that occur between the date of such financial
statements and the date of investment in the subsidiary.
It may be mentioned that positive or negative differential is separately recognised
only in purchase method. This differential calculated as cost of control is shown in
the consolidated balance sheet.
A detailed illustration below will help in understanding the concept of goodwill /
capital reserve.
Example 1
The following information is given as at 31 March 20X1
P Ltd. S Ltd.
Non-current Assets:
PPE 2,000 500
Investment in Subsidiary 1,000
Net Current Assets 2,000 500
5,000 1,000
Issued Capital 500 1,000
Reserves and Surplus 4,500
5,000 1,000
P Ltd. acquired 100% of shares of S Ltd. on 31 March 20X1 for ` 1,000.
Since P Ltd. has acquired S Ltd., we will have to determine goodwill / capital
reserve. Let us understand why goodwill / capital reserve arises in case of
consolidation, and what would be the interpretation of the same.

In the given case, P Ltd. acquired all the shares of S Ltd. by paying ` 1,000. This
payment (i.e., purchase consideration) would be made by P Ltd. to the
shareholder(s) of S Ltd. (hence the transfer of this amount would not appear in the
books of S Ltd.).
By paying ` 1,000, P Ltd. has acquired ‘control’ over S Ltd. This acquisition is quite
different from the concept of amalgamation done in accordance with AS 14, though
the concept of goodwill / capital reserve is similar. Under AS 14, the target
company would generally liquidate, and all assets and liabilities would be
transferred from the Selling Company to the Purchasing Company. In case of
consolidation, P Ltd. is acquiring ‘control’ i.e., by way of acquiring equity shares in S
Ltd.. Thus, S Ltd. continues to exist, and the assets and liabilities of S Ltd. are not
transferred to P Ltd., but instead continue to remain with S Ltd. only. However, since
in substance, acquisition has taken place (albeit through transfer of control), the
purchase consideration of ` 1,000 will be compared with the net worth of
S Ltd., which is ` 1,000. Since amount paid (i.e., purchase consideration) equals the
net worth, no goodwill / capital reserve is recognized. In case the amount paid (i.e.,
purchase consideration) would be higher / lower than the net worth of S Ltd., such
difference would be recognized in Goodwill / Capital Reserve respectively.
The calculation of goodwill is presented below:
Tangible Assets 500
Net Current Assets 500
1,000
Less: Liabilities NIL
Net Worth of S Ltd. 1,000
Investment in S Ltd. (purchase consideration) 1,000
Goodwill / (Capital Reserve) NIL
Example 2
Modifying example 1, the following information is given as at 31 March 20X1

P Ltd. S Ltd.
Non-current Assets:
PPE 2,000 500
5,000 1,000
Issued Capital 500 700#
Reserves and Surplus 4,500 300#
5,000 1,000
# As compared to Example 1 – There is a difference in the break-up of net worth of
S Ltd. (Example 1 – Issued capital was 1,000 and Reserves and Surplus was Nil; The
Net worth is 1,000).
Like Example 1 above P Ltd. has acquired ‘control’ over S Ltd. by paying ` 1,000.
Accordingly, the purchase consideration of ` 1,000 will be compared with the net
worth of S Ltd. which is ` 1,000. Since amount paid (i.e., purchase consideration)
equals the net worth, no goodwill / capital reserve is recognized. In case the
amount paid (i.e., purchase consideration) would be higher / lower than the net
worth of S Ltd., such difference would be recognized in Goodwill / Capital Reserve
respectively.
Tangible Assets 500

1,000

Goodwill / (Capital Reserve) NIL

Example 3
Modifying example 2, the following information is given as at 31 March 20X1
P Ltd. S Ltd.
Non-current Assets:
PPE 2,000 500

5,200 1,000
Issued Capital 700 700
Reserves and Surplus 4,500 300
5,200 1,000
P Ltd. acquired 100% of shares of S Ltd. on 31 March 20X1 for ₹ 1,200.

Like Examples 1 and 2 above P Ltd. has acquired ‘control’ over S Ltd. by paying
` 1,200. Accordingly, the purchase consideration of ` 1,200 will be compared with
the net worth of S Ltd. which is ` 1,000. Since amount paid (i.e., purchase
consideration) exceeds the net worth, such excess of is recognized as goodwill. In
case the amount paid (i.e., purchase consideration) would be lower than the net
worth of S Ltd., such difference would be credited to Capital Reserve.
Tangible Assets 500
1,000

Goodwill / (Capital Reserve) 200

1.12 MINORITY INTERESTS

Minority interest is that part of the net assets of a subsidiary attributable to
interest which is held by outsiders.
Minority interests in the net income of consolidated subsidiaries for the reporting
period are identified and adjusted against the income of the group in order to
arrive at the net income attributable to the shareholders of the holding company .
Minority interests should be presented in the consolidated balance sheet

separately from liabilities and the equity of the parent’s shareholders.
Minority interest in the income of the group should be separately presented in

the consolidated income statement.
Minority interests in the net assets consist of:
(i) The amount of equity attributable to minorities at the date on which

investment in a subsidiary is made and
(ii) The minorities’ share of movements in equity since the date the parent-
subsidiary relationship came in existence.
The losses applicable to the minority in a consolidated subsidiary may exceed the
minority interest in the equity of the subsidiary. The excess, and any further losses
applicable to the minority, are adjusted against the majority interest except to the
extent that the minority has a binding obligation to and is able to make good the
losses. If the subsidiary subsequently reports profit, all such profits are allocated
to the majority interest until the minority’s share of losses previously absorbed by
the majority has been recovered.
Example 4
Modifying Example 2, the following information is given as at 31 March 20X1:
P Ltd. S Ltd.
Non-current Assets:
Tangible Assets 2,000 500

5,000 1,000
Issued Capital 500 700
Reserves and Surplus 4,500 300
5,000 1,000
In the given case, P Ltd. acquired 80% of the shares of S Ltd. by paying ` 1,000. This
payment (i.e., purchase consideration) would be made by P Ltd. to the
shareholder(s) of S Ltd.
By paying ` 1,000, P Ltd. has acquired ‘control’ over S Ltd. We cannot say that P
Ltd. has acquired only ‘80% control’, since its shareholding in S Ltd. will enable it to
take all the decisions regarding S Ltd.’s operations and usage of assets and
repayment of liabilities. However, the fact remains that 20% stake does NOT belong
to S Ltd. It belongs to outsiders, who are called ‘Minority Interest’ in accordance
with AS 21. Accordingly, in this case, the purchase consideration of
` 1,000 will be compared with 80% of the net worth of S Ltd. Any excess or deficit
would be recorded as goodwill / capital reserve respectively. 20% of the net worth
on the date of acquisition would be recorded separately as Minority Interest.
AS 21 defines Minority Interest as that part of the net results of operations and of
the net assets of a subsidiary attributable to interests which are not owned, directly
or indirectly through subsidiary(ies), by the parent. As per Schedule III to the
Companies Act, 2013, “Minority Interests” in the balance sheet within equity shall
be presented separately from the equity of the owners of the parent.

In the given case, the calculation of goodwill is presented below:
Tangible Assets: 80% being share of parent 400
Net Current Assets: 80% being share of parent 400
800
Net Worth of S Ltd.: attributable to the parent's shareholding 800
Goodwill / (Capital Reserve) 200
1.13. PROFIT OR LOSS OF SUBSIDIARY

COMPANY
For the purpose of consolidated balance sheet preparation, all reserves and
profits (or losses) of subsidiary company should be classified into pre and post-
acquisition reserves and profits (or losses).
Profits (or losses) earned (or incurred) by subsidiary company up to the date of
acquisition of the shares by the holding company are pre acquisition or capital
profits (or loss).
Similarly, all reserves of subsidiary company up to the date of acquisition are

capital reserves from the view point of holding company. If the holding interest in
subsidiary is acquired during the middle or some other period of the current year,
pre-acquisition profit should be calculated accordingly.
The minority interest in the reserves and profits (or losses) of subsidiary company
should be transferred to minority interest account which will also include share
capital of subsidiary company held by outsiders / minority shareholders.

Minority Interest = Share Capital of subsidiary belonging to outsiders + Minority

interest in reserves and profits of subsidiary company
The holding company’s interest in the pre-acquisition reserves and profits (or
losses) should be adjusted against cost of control to find out goodwill or capital
reserve on consolidation. The reserves and profits (or loss) of subsidiary company,
representing holding company’s interest in post-acquisition or revenue reserves
and profits (or losses), should be added to the reserves and profits (or losses) of
holding company.
1.14 CONSOLIDATION ADJUSTMENTS

A. REVALUATION OF ASSETS OF SUBSIDIARY COMPANY
It may be possible that the fair value of the assets of the subsidiary may be
different from the book value. Hence, the parent may choose to perform a
revaluation of the assets of the subsidiary for the purposes of consolidation. It
may be noted that such revaluation is not performed in the standalone / separate
financial statements of the subsidiary. The profit or loss on revaluation of fixed
assets of subsidiary should also be treated as capital profit or loss. But if the fall
in the value of the asset occurs after the date of acquisition, the loss should be
treated as revenue loss. Adjustment for depreciation would be made in the profit
and loss account of the subsidiary.
Depreciation on changed value of the assets shall be given effect to. Depreciation
on revalued assets will be taken as capital or revenue depending on the period
for which the depreciation belongs to. Hence the period for depreciation is
important to be considered.

Property, Plant and Equipment (PPE)
Initial Recognition Subsequent Measurement

Fair Value (-) Carrying Amount Additional Depreciation would arise
in case of initial upward or Reversal
(As on the date of acquisition)
of excess depreciation would arise in
case of initial downward valuation.
PPE A/c Dr. xxx Post P/L Dr. xxx

To Pre- P/L xxx To PPE xxx
(In case of upward revaluation) (Additional depreciation)
Pre- P/L Dr. xxx PPE Dr. xxx

To PPE xxx To Post P/L xxx
(In case of downward revaluation) (Reversal of excess depreciation)
1. The above entries are not recorded in the standalone books of either the
subsidiary or the parent. These entries are only for understanding the
impact in the consolidated financial statements and as such, only the effect
of such entries will appear in the consolidated financial statements (and not
the standalone / separate financial statements).
2. It is presumed that the subsidiary does not follow the revaluation model for
accounting of fixed assets. If it had to follow, then the standalone balance
sheet of the subsidiary would already contain the impact of the revaluation.
The debit /credit on account of revaluation could alternatively be taken to

the Revaluation Reserve or the P/L depending on whether it is a first -time
upward / downward revaluation. However, as ultimately the reserv es have to
be analyzed between pre- and post-acquisition for the purposes of
consolidation, the nature of reserves is irrelevant.

Example 5
H Ltd. acquires 70% of the equity shares of S Ltd. on 1.1.20X1. On that date, paid
up capital of S Ltd. was 10,000 equity shares of ` 10 each; accumulated reserve
balance was ` 1,00,000. H Ltd. paid ` 1,60,000 to acquire 70% interest in the S Ltd.
Assets of S Ltd. were revalued on 1.1.20X1 and a revaluation loss of ` 20,000 was
ascertained. The book value of shares of S Ltd. is calculated as shown below:
`
70% of the Equity Share Capital ` 1,00,000 70,000
70% of Accumulated Reserve ` 1,00,000 70,000
70% of Revaluation Loss ` 20,000 (14,000)
1,26,000
So, H Ltd. paid a positive differential of ` 34,000 i.e. ` (1,60,000 – 1,26,000). This
differential is called goodwill and is shown in the balance sheet under the head
intangibles.
Example 6
A Ltd. acquired 70% interest in B Ltd. on 1.1.20X1. On that date, B Ltd. had paid-up
capital of ` 1,00,000 consisting of 10,000 equity shares of ` 10 each and
accumulated balance in reserve and surplus of `1,00,000. On that date, assets and
liabilities of B Ltd. were also revalued and revaluation profit of ` 20,000 was
calculated. A Ltd. paid ` 1,30,000 to purchase the said interest.
In this case, the book value of Shares of B Ltd. is calculated as shown below:
`
70% of the Equity Share Capital `1,00,000 70,000
70% of Reserves and Surplus ` 1,00,000 70,000
70% of Revaluation Profit ` 20,000 14,000

1,54,000
In this case, a negative differential of ` 24,000 arises i.e. (1,54,000 – 1,30,000) which
is called and presented as capital reserve.

Example 7
H Ltd. acquired 16,000 equity shares of ` 10 each, in S Ltd. on October 1, 20X1 for
` 3,06,800. The profit and loss account of S Ltd. showed a balance of `10,000 on
April 1,20X1. The plant and machinery of S Ltd. which stood in the books at
` 1,50,000 on April 1,20X1 was considered worth ` 1,80,000 on the date of
acquisition.
The information of the two companies as at 31-3-20X2 was as follows:
H Ltd.(` ) S Ltd. (` )
Shares capital (fully paid equity shares of ` 10 each) 5,00,000 2,00,000
General reserve 2,40,000 1,00,000
Profit and loss account 57,200 82,000
Current Liabilities 1,69,800 33,000
Land and building 1,80,000 1,90,000
Plant and machinery 2,40,000 1,35,000
Investments 3,06,800
Current assets 2,40,200 90,000
In this case,
Percentage of holding:
No. of Shares Percentage
Holding Co. : 16,000 (80%)
Minority shareholders : 4,000 (20%)
TOTAL SHARES : 20,000

Impact of Revaluation of Plant and Machinery will be as -
`
Book value of Plant and Machinery as on 01-04-20X1 1,50,000
Depreciation Rate
(1,50,000-1,35,000)
= 15,000/1,50,000 X100 10%
1,50,000
Book value of Plant and Machinery as on 01-10-20X1 after six months 1,42,500
depreciation @10% (1,50,000-7,500)
Revalued at 1,80,000
Revaluation profit (1,80,000-1,42,500) 37,500
Share of H Limited in Revaluation Profit (80%) 30,000
Share of Minority in Revaluation profit (20%) 7,500
Additional Depreciation on appreciated value to be charged from
post-acquisition profits
(10% of ` 1,50,000 for 6 months) + (10% of ` 1,80,000 for 6 months) 1500

less ` 15,000 (as already charged)
Share of H Limited in additional depreciation that will reduce its share 1,200
(80%) in post-acquisition profit by
Share of Minority Interest in additional depreciation 300
B. DIVIDEND RECEIVED FROM SUBSIDIARY(IES)

As per AS 13, ‘Accounting for Investments’, Interest, dividends and rentals
receivables in connection with an investment are generally regarded as income,
being the return on the investment.
However, in some circumstances, such inflows represent a recovery of cost and do
not form part of income.
Example: When unpaid interest has accrued before the acquisition of an interest-
bearing investment and is therefore included in the price paid for the investment,
the subsequent receipt of interest is allocated between pre-acquisition and post-
acquisition periods; the pre-acquisition portion is deducted from cost.

When dividends on equity are declared from pre-acquisition profits, a similar
treatment (i.e. as mentioned above) may apply. If it is difficult to make such an
allocation except on an arbitrary basis, the cost of investment is normally reduced
by dividends receivable only if they clearly represent a recovery of a part of the
cost.
When holding company receives dividend from a subsidiary company, it must
distinguish between the part received out of capital profits (i.e. pre-acquisition
profits) and revenue profits (i.e. post-acquisition profits); capital profits are
credited to Investment account (being capital receipts) and revenue profits are
credited to the Profit & Loss Account.
If the controlling interest was acquired during the course of a year, profit for that
year must be apportioned into the pre-acquisition and post-acquisition portions,
on the basis of time in the absence of information on the point.
It must be understood that the term ‘capital profit’, in this context, apart from the
generic meaning of the term, connotes profit earned by the subsidiary company
till the date of acquisition. As a result, profits which may be of revenue nature for
the subsidiary company may be capital profits so far as the holding company is
concerned.
Treatment in case of post-acquisition dividend
Post acquisition dividend
Accounted by Not accounted by In the books of

the subsidiary the subsidiary the holding
company
No further Adjusted at the time

adjustment Accounted by
of consolidation crediting P&L A/c
required
of the holding
company

Treatment in case of pre-acquisition dividend
Accounted by holding Not accounted by Not accounted by

company holding company subsidiary company
If correctly accounted If wrongly accounted Adjust the same at Adjust the same at
as reduction to the by crediting to P&L the time of the time of
cost of investment A/c consolidation consolidation
Reverse the entry Account for as Reduce the pre-

No further passed and credit reduction to cost of acquisition profit of
adjustment required investment in investment subsidiary and then
subsidiary distribute it into holding
and minority interest
Also reduce the cost

of investment
Dividends received out of profits earned before purchase of investments normally

also are credited to the Investment Account.
Example 8
If shares in X Ltd., are purchased in January 20X2 and in April 20X2, X Ltd., declares
a dividend in respect of 20X1, the dividend received by the holder of the shares
correctly should not be treated as income but as capital receipt and credited to
Investment Account.
Note: In case of issue of bonus shares by the subsidiary company, the holding
company, like other holders, record no entry; only the number of shares held is
increased.
Illustration 1
From the following data, determine in each case:
(1) Minority interest at the date of acquisition and at the date of consolidation.
(2) Goodwill or Capital Reserve.

(3) Amount of holding company’s profit in the consolidated Balance Sheet
assuming holding company’s own Profit & Loss Account to be ` 2,00,000 in
each case:
Subsidiary % Cost Date of Consolidation

Company shares acquisition Date
owned
1.1.20X1 31.12.20X1
Case Share Profit & Share Profit &

Capital Loss Capital Loss
Account Account
` ` ` ` `
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000
Solution
(1) Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting
all its liabilities i.e. in this case it should be equal to Share Capital + Profit &
Loss A/c
Minority % Minority Minority interest

Shares interest as at as at the date of
Owned the date of consolidation
acquisition
[E] [E] x [A + B] ` [E] X [C + D] `
Case 1 [100-90] 10 % 15,000 17,000
Case 2 [100-85] 15 % 19,500 18,000

Case 3 [100-80] 20 % 14,000 14,000
Case 4 [100-100] NIL Nil Nil

A = Share capital on 1.1.20X1

B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1
(2) Calculation of Goodwill or Capital Reserve
Shareholding Cost Total Equity Parent’s Goodwill Capital

Portion Reserve
of equity
% [F] [G] [A] + [B] = [F] x [C] ` [G] – ` [H] –
[C] =H [H] [G]
Case 1 90 % 1,40,000 1,50,000 1,35,000 5,000 —

Case 2 85 % 1,04,000 1,30,000 1,10,500 — 6,500
Case 3 80 % 56,000 70,000 56,000 Nil Nil
Case 4 100 % 1,00,000 90,000 90,000 10,000 —
(3) The balance in the Profit & Loss Account on the date of acquisition
(1.1.20X1) is Capital profit, as such the balance of Consolidated Profit & Loss
Account shall be equal to Holding Co.’s profit.
On 31.12.20X1 in each case the following amount shall be added or
deducted from the balance of holding Co.’s Profit & Loss account.
% Share P & L as on P & L as on P & L post Amount to be

holding 1.1.20X1 consolidati acquisition added /
on date (deducted) from
holding’s P & L
[M]
[K] [L] [N] = [M]-[L]
[O] = [K] x [N]
1 90 % 50,000 70,000 20,000 18,000

2 85 % 30,000 20,000 (10,000) (8,500)
3 80 % 20,000 20,000 NIL NIL
4 100 % 40,000 55,000 15,000 15,000

Illustration 2
XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 20X1 for ` 1,40,000. The
issued capital of ABC Ltd., on 1st January, 20X1 was ` 1,00,000 and the balance in
the Profit & Loss Account was ` 60,000.
During the year ended 31st December, 20X1, ABC Ltd. earned a profit of ` 20,000
and at year end, declared and paid a dividend of ` 15,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1st January, 20X1 and
31st December, 20X1? Also please check whether there should be any goodwill/
capital reserve at the date of acquisition.
Solution
Total dividend paid is ` 15,000 (assumed to be out of post-acquisition profits),
hence dividend received by XYZ will be credited to P & L.
XYZ Ltd.’s share of dividend = ` 15,000 X 80% = ` 12,000
In the books of XYZ Ltd.
` `
Bank A/c Dr. 12,000
To Profit & Loss A/c 12,000
(Dividend received from ABC Ltd credited to
P&L A/c being out of post-acquisition profits –
as explained above)
Goodwill on consolidation (at the date of ` `
acquisition):
Cost of shares 1,40,000
Less: Face value of capital i.e. 80% of capital 80,000
Add: Share of capital profits [60,000X 80 %] 48,000 (1,28,000)

Goodwill 12,000

Minority interest on:

- 1st January, 20X1:
20% of ` 1,60,000 [1,00,000 + 60,000] 32,000
- 31st December, 20X1: 33,000
20% of ` 1,65,000 [1,00,000 + 60,000 +
20,000 – 15,000]
Illustration 3
Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 20X1 at a cost
of ` 70 lakhs. The following information is available from the balance sheet of Zed
Ltd. as on 31st March, 20X1:
` in lakhs
Property, plant and equipment 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
Current Liabilities 50
The following revaluations have been agreed upon (not included in the above
figures):
Property, plant and equipment Up by 20%
Investments Down by 10%
Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31 st March,
20X1 (Face value - ` 10 per share). Exe Ltd. purchased the shares of Zed Ltd. @
` 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Zed
Ltd.

Solution
Revalued net assets of Zed Ltd. as on 31st March, 20X1
` in lakhs ` in lakhs
Property, plant and equipment [120 X 120%] 144.0
Investments [55 X 90%] 49.5

Current Assets 70.0
Loans and Advances 15.0
Total Assets after revaluation 278.5

Less: 15% Debentures 90.0
Current Liabilities 50.0 (140.0)
Equity / Net Worth 138.5

Exe Ltd.’s share of net assets (70% of 138.5) 96.95
Exe Ltd.’s cost of acquisition of shares of Zed Ltd.
(` 70 lakhs – ` 7 lakhs*) 63.00
Capital reserve 33.95
* Total Cost of 70 % Equity of Zed Ltd ` 70 lakhs

Purchase Price of each share ` 20
Number of shares purchased [70 lakhs /` 20] 3.5 lakhs
Dividend @ 20 % i.e. ` 2 per share ` 7 lakhs
Since dividend received is for pre-acquisition period, it has been reduced from
the cost of investment in the subsidiary company.
Illustration 4
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.20X1 at cost of ` 10,00,000
when B Ltd. had an equity share capital of ` 10,00,000 and reserves and surplus of
` 80,000. In the four consecutive years, B Ltd. fared badly and suffered losses of
` 2,50,000, ` 4,00,000, ` 5,00,000 and ` 1,20,000 respectively. Thereafter in 20X5-
X6, B Ltd. experienced turnaround and registered an annual profit of ` 50,000. In

the next two years i.e. 20X6-X7 and 20X7-X8, B Ltd. recorded annual profits of
` 1,00,000 and ` 1,50,000 respectively. Show the minority interests and cost of
control at the end of each year for the purpose of consolidation.
Solution
The losses applicable to the minority in a consolidated subsidiary may exceed the
minority interest in the equity of the subsidiary. In such cases, AS 21 prescribes
that the excess, and any further losses applicable to the minority, are adjusted
against the majority interest except to the extent that the minority has a binding
obligation to, and is able to, make good the losses. If the subsidiary subsequently
reports profits, all such profits are allocated to the majority interest until the
minority's share of losses previously absorbed by the majority has been
recovered.
Where the minority interest has a binding obligation (say by way of a
shareholders’ agreement), then the share of losses will be attributed to the
minority interest even if it exceeds the minority interest in the equity (i.e., debit
balance in minority interest). Since information on the existence of a binding
obligation is not given in the question, we solve as if such obligation does not
exist, and hence the minority interests will be computed as follows:
Year Profit/(Loss) Minority Additional Minority's Share Cost of

Interest Consolidated of losses borne Control
(30%) P & L (Dr.) by A Ltd.
Cr. (for the
year ended
balance)
` Balance
At the time -
of 3,24,000
acquisition in
-
20X1
(W.N.)

20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000
(W.N.)
Balance 2,49,000
20X2-X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000
Balance 1,29,000
20X3-X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
Loss of 21,000 (21,000) 21,000 21,000

minority
borne by
Holding Co.
Balance Nil (3,71,000)
20X4-X5 (1,20,000) (36,000) (84,000) 2,44,000
Loss of
minority 36,000 (36,000) 36,000 57,000
borne by
Holding Co.
Balance Nil (1,20,000)
20X5-X6 50,000 15,000 35,000 2,44,000
Profit share (15,000) 15,000 (15,000) 42,000

of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.
Balance Nil 50,000

20X6-X7 1,00,000 30,000 70,000

Profit share (30,000) 30,000 (30,000) 12,000 2,44,000
of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.
Balance Nil 100,000

20X7-X8 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000
(12,000) 12,000
Balance 33,000 1,17,000
Working Note:
Calculation of Minority interest and Cost of control on 1.4.20X1
Share of Minority
Holding Interest
Co.
100% 70% 30%
(`) (`) (`)
Share Capital 10,00,000 7,00,000 3,00,000
Reserve 80,000 56,000 24,000
7,56,000 3,24,000
Less: Cost of investment (10,00,000)
Goodwill 2,44,000
Illustration 5
Variety Ltd. holds 46% of the paid-up share capital of VR Ltd. The shares were

acquired at a market price of ` 17 per share. The balance of shares of VR Ltd. are
held by a foreign collaborating company. A memorandum of understanding has
been entered into with the foreign company providing for the following:
(a) The shares held by the foreign company will be sold to Variety Ltd. The price
per share will be calculated by capitalising the yield at 15%. Yield, for this
purpose, would mean 40% of the average of pre-tax profits for the last 3
years, which were ` 30 lakhs, ` 40 lakhs and ` 65 lakhs.
(b) The actual cost of the shares to the foreign company was ` 5,40,000 only. The
profit that would accrue to them would be taxable at an average rate of 30%.
The tax payable will be deducted from the proceeds and Variety Ltd. will pay
it to the Government.
(c) Out of the net consideration, 50% would be remitted to the foreign company
immediately and the balance will be an unsecured loan repayable after two
years.
The above agreement was approved by all concerned for being given effect to on
1.4.20X1. The total assets of VR Ltd. as on 31st March, 20X1 was ` 1,00,00,000. It
was decided to write down Property, Plant and Equipment by ` 1,75,000. Current
liabilities of VR Ltd. as on the same date were ` 20,00,000. The paid-up share
capital of VR Ltd. was ` 20,00,000 divided into 2,00,000 equity shares of ` 10 each.
Find out goodwill/capital reserve to Variety Ltd. on acquiring wholly the shares of
VR Ltd.
Solution
1. Computation of Purchase Consideration
 40 30 + 40 + 65 
 × 
(a) Yield of VR Ltd.:  100 3  ` 18 lakhs
(b) Price per share of VR Ltd.:

 18 lakhs 
 
Capitalized Yield:  0.15  ` 120 lakhs
No. of shares 2 lakhs
Therefore, price per share ` 60

(c) Purchase Consideration for 54% shares in VR Ltd.

2 lakh shares x 54% x ` 60 per shares ` 64.80 lakhs
(d) Discharge of Purchase Consideration:
30
Tax at source (` 64.80 lakhs – ` 5.40 lakhs) × 100 ` 17.82 lakhs
50% of purchase consideration (net of tax) in cash ` 23.49 lakhs
[` (64.80 – 17.82) x 50%]

Balance – Unsecured Loan ` 23.49 lakhs
2. Goodwill / Capital Reserve to Variety Ltd.
` in lakhs
Total Assets 100.00

Less: Reduction in Value of Property, Plant and (1.75)
Equipment
98.25
Less: Current Liabilities (20.00)
Net Assets of VR Ltd. on Date of Acquisition 78.25
Purchase Consideration: 54% purchased from Foreign 64.80

Co.
Investment: 46% existing stake 15.64 (80.44)

Goodwill on Date of Acquisition 2.19
Illustration 6
A Ltd. acquired 60% shares of B Ltd. @ ` 20 per share. Following is the extract of
Balance Sheet of B Ltd.:
`
10,00,000 Equity Shares of ` 10 each 1,00,00,000
10% Debentures 10,00,000

Trade Payables 55,00,000

Property, Plant and Equipment 70,00,000
Investments 45,00,000
Current Assets 68,00,000
Loans and Advances 22,00,000
On the same day B Ltd. declared dividend at 20% and as agreed between both the
companies Property, Plant and Equipment were to be depreciated @ 10% and
investment to be taken at market value of ` 60,00,000. Calculate the Goodwill or
Capital Reserve to be recorded in Consolidated Financial Statements.
Solution
Since dividend is declared by B Ltd. on the date of acquisition itself, it would be
out of the divisible profits of B Ltd. existing on the date of acquisition i.e., pre-
acquisition profits from the perspective of A Ltd. Accordingly, as per AS 13, such
pre-acquisition dividend would be reduced from the cost of investment, as seen
below in the determination of Goodwill on the date of acquisition.
` `
Assets
Property, Plant and Equipment 70,00,000
Less: Value written off (` 70 lakhs x 10%) (7,00,000)
63,00,000
Investments at Market Value 60,00,000
Loans and Advances 22,00,000 2,13,00,000
Less: Liabilities
Trade Payables 55,00,000
10% Debentures 10,00,000 (65,00,000)
Net Assets of B Ltd. 1,48,00,000

Share of A Ltd. in Net Assets of B Ltd.: 60% 88,80,000

Less: Cost of Investment in B Ltd. (60% stake):
10,00,000 Equity Shares x 60% x ` 20 per share 1,20,00,000
Less: Pre-acquisition dividend: 6,00,000 shares x
`2 (12,00,000) (1,08,00,000)
Goodwill on Date of Acquisition 19,20,000
Illustration 7
H Ltd. acquired 3,000 shares in S Ltd., at a cost of ` 4,80,000 on 31.7.20X1. The
capital of S Ltd. consisted of 5,000 shares of ` 100 each fully paid. The Profit & Loss
Account of this company for 20X1 showed an opening balance of ` 1,25,000 and
profit for the year was ` 3,00,000. At the end of the year, it declared a dividend of
40%. Record the entry in the books of H Ltd., in respect of the dividend. Assume the
profit is accruing evenly and calendar year as financial year.
Solution
The profits of S Ltd., have to be divided between capital and revenue profits from
the point of view of the holding company:
Capital Revenue
Profit (Pre- Profit (Post-
acquisition) acquisition)
` `
Balance on 1.1.20X1 1,25,000 —
Profit for 20X1 (3,00,000 × 7/12) 1,75,000 (3,00,000×5/12) 1,25,000
Total 3,00,000 1,25,000
Proportionate share of H Ltd. (3/5) 1,80,000 75,000
Total dividend declared = ` 5,00,000 X 40 % = ` 2,00,000
H Ltd.’s share in the dividend = ` 2,00,000 X 3/5 = ` 1,20,000

There can be two situations as regards the treatment of dividend of ` 1,20,000:

(1) The profit for 20X1 has been utilised to pay the dividend.
The share of H Ltd in profit for the first seven months of S Ltd = ` 1,05,000
(i.e. ` 1,75,000 × 3/5)
Profit for the remaining five months = ` 75,000
(i.e.` 1,25,000 × 3/5).
The dividend of ` 1,20,000 will be adjusted in this ratio of 1,05,000: 75,000 =

` 70,000 out of profits up to 31.7.20X1 and ` 50,000 out of profits after that
date.
The dividend out of profits subsequent to 31.7.20X1 will be revenue income
and that out of earlier profits will be capital receipt. Hence the entry will be:
` `
Bank Dr. 1,20,000
To Investment Account 70,000
To Profit and Loss Account 50,000
(2) Later profits have been utilised first and then pre- acquisition profits.
In such a case, the whole of ` 75,000 (share of H Ltd. in profits of S Ltd.,
after 31.7.20X1) would be received and treated as revenue income; the
remaining dividend, `45,000 (`1,20,000 less ` 75,000) would be capital
receipt. The entry would be:
` `
Bank Dr. 1,20,000
To Investment Account 45,000

To Profit & Loss Account 75,000
Note: Point (2) discussed above can arise only if there is definite
information about the profits utilized. In practice, such treatment is rare.
Illustration 8
A Ltd. and B Ltd. provide the following information:

` ‘000s
A Ltd. B Ltd.
Equity Shares 6,000 5,000
6% Preference Shares NIL 1,000
General Reserve 1,200 800
Profit and Loss Account 1,020 1,790
Trade Payables 3,850 3,410
Dividend Payable 600 500
Goodwill 100 20
Property, Plant and Equipment 3,850 2,750
Investment 1,620 1,100
Inventory 1,900 4,150
Trade Receivables 4,600 4,080
Cash & Bank 600 400
A Ltd. purchased 3/4th interest in B Ltd. at the beginning of the year at the
premium of 25%. Following other information is available:
a. Profit & Loss Account of B Ltd. includes ₹ 1,000 thousands bought forward from
the previous year.
b. The General Reserve balance is brought forward from the previous year.
c. The directors of both the companies have declared a dividend of 10% on equity
share capital for the previous and current year.
From the above information calculate Pre- and Post-acquisition Profits, Minority
Interest and Cost of Control.
Solution
Calculation of Pre- and Post-Acquisition Profits:
Pre-Acquisition Post-Acquisition
Profits (₹) Profits (₹)
Profit & Loss Account 10,00,000 7,90,000
General Reserve 8,00,000 NIL

18,00,000 7,90,000
Less: Share of Minority Interest: (¼) (4,50,000) (1,97,500)
Attributable to Parent 13,50,000 5,92,500
(Cost of Control) (Post-acquisition
Profits)
Calculation of Minority Interest:
Particulars ₹
Paid-up Equity Share Capital (₹ 50,00,000 x ¼) 12,50,000
Paid-up Preference Share Capital 10,00,000
Share in Reserves:
Profit & Loss Account: ₹ 17,90,000 x ¼ 4,47,500
General Reserve: ₹ 8,00,000 x ¼ 2,00,000
Minority Interest 28,97,500
Calculation of Goodwill/Capital Reserve
₹ ₹
Cost of Investment in Subsidiary: 46,87,500

₹ 50,00,000 x 75% x 125% (cost + 25%
premium)
Less: Pre-acquisition dividend (3,75,000) 43,12,500
Less: Net Worth of B Ltd. on Date of Acquisition

(attributable to A Ltd.):
Paid-up Capital 37,50,000
Pre-acquisition Reserves 13,50,000 (51,00,000)
Capital Reserve 7,87,500

Illustration 9
On 31st March, 20X1, P Ltd. acquired 1,05,000 shares of Q Ltd. for ` 12,00,000. The
position of Q Ltd. on that date was as under:
Property, plant and equipment 10,50,000
1,50,000 equity shares of ` 10 each fully paid 15,00,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Trade payables 1,05,000
P Ltd. and Q Ltd. give the following information on 31 st March, 20X3:
P Ltd. Q Ltd.
` `
Equity shares of ` 10 each fully paid (before bonus 45,00,000 15,00,000

issue)
Securities Premium 9,00,000 –
Pre-incorporation profits – 30,000
General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Trade payables 5,55,000 2,10,000
Property, plant and equipment 79,20,000 23,10,000
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Current Assets 44,10,000 17,55,000

Directors of Q Ltd. made bonus issue on 31.3.20X3 in the ratio of one equity share
of ` 10 each fully paid for every two equity shares held on that date. Bonus shares
were issued out of post-acquisition profits by using General Reserve.
Calculate as on 31st March, 20X3 (i) Cost of Control/Capital Reserve; (ii) Minority
Interest; (iii) Consolidated Profit and Loss Account in each of the following cases:
(a) Before issue of bonus shares;

(b) Immediately After issue of bonus shares.
Solution
Shareholding pattern
Particulars Number of Shares % of holding

a. P Ltd.
(i) Purchased on 31.03.20X1 1,05,000
(ii) Bonus Issue (1,05,000/2) 52,500
Total 1,57,500 70%
b. Minority Interest 67,500 30%
Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii)
Consolidated Profit and Loss Account as on 31st March, 20X3:
(a) Before issue of bonus shares
(i) Cost of control/capital reserve ` `

Investment in Q Ltd. 12,00,000
Less: Face value of investments (Share 10,50,000
Capital)
Capital profits (W.N.) 63,000 (11,13,000)
Cost of control (i.e., Goodwill) 87,000
(ii) Minority Interest `
Share Capital 4,50,000
Capital profits (W.N.) 27,000
Revenue profits (W.N.) 6,79,500
11,56,500

(iii) Consolidated profit and loss account – `

P Ltd.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. 15,85,500
(W.N.)
31,60,500
(b) Immediately after issue of bonus shares
(i) Cost of control/capital reserve ` `
Face value of investments (` 10,50,000 +

` 5,25,000) 15,75,000
Capital Profits (W.N.) 63,000 16,38,000
Less: Investment in Q Ltd. (12,00,000)
Capital reserve 4,38,000
(ii) Minority Interest `
Share Capital (` 4,50,000 + ` 2,25,000) 6,75,000
Capital Profits (W.N.) 27,000
Revenue Profits (W.N.) 4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account – `

P Ltd.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd.

(W.N.) 10,60,500
26,35,500

Working Note:
Analysis of Profits of Q Ltd.
Capital Profits Revenue Profits

(Pre-acquisition) (Post-acquisition)
(Before and after Before After Bonus

issue of bonus Bonus Issue
shares) Issue
` `
`
Pre-incorporation profits 30,000
Profit and loss account on 60,000

31.3.20X1
90,000
General reserve* 19,05,000 19,05,000
Less: Bonus shares (7,50,000)
11,55,000
Profit for period of 1st

April, 20X1 to 31 st March, 3,60,000 3,60,000
20X3
(` 4,20,000 – ` 60,000)
22,65,000 15,15,000
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
Minority’s share (30%) 27,000 6,79,500 4,54,500
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit

and Loss Account.

Illustration 10
Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31 March,
20X1 from the following information:
H Ltd. S Ltd.
` `
PPE 5,00,000 3,00,000
Investments
(20,000 equity shares of S Ltd.) 2,20,000
Current Assets 1,55,000 1,00,000
Share capital (Fully paid equity shares of ` 10 5,00,000 2,50,000
each)
Profit and loss account 2,00,000 1,00,000
Trade Payables 1,75,000 50,000
H Ltd. acquired the shares of S Ltd. on 31 March, 20X1.
st
Solution
Holding Co : 20,000 (80%)
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd.
as at 31st March,20X1
Note No Amount (`)
I EQUITY AND LIABILITIES

1 Shareholder’s Fund
(a) Share Capital 1 5,00,000
(b) Reserve and Surplus 2 2,60,000

2 Minority interest 3
3 Current Liabilities 70,000
(a) Trade payables 4
2,25,000
Total 10,55,000
II ASSETS
1. Non-Current Assets
PPE 5 8,00,000
2. Current Assets 6 2,55,000
Total 10,55,000
Notes to Accounts
Amounts (`)
1 Share capital
50,000 Equity Shares @ `10 each 5,00,000
2 Reserve and Surplus
Capital Reserve (W.N. ) 60,000
Profit and loss account 2,00,000
2,60,000
3 Minority Interest
Paid up value of shares 50,000

Add: Share in Profit and loss account 20,000 70,000
4 Trade payables
H Ltd. 1,75,000
S Ltd. 50,000
2,25,000

5 PPE
H Ltd. 5,00,000
S Ltd. 3,00,000
8,00,000
6 Current Assets
H Ltd. 1,55,000
S Ltd. 1,00,000
2,55,000
Working Note:
Determination of Goodwill/(Capital Reserve) (`)
Cost of investment 2,20,000
Less: Paid up value of shares (80% of 2,50,000) 2,00,000

Share in pre-acquisition profits (80% of 1,00,000) 80,000
(2,80,000)
Capital Reserve (60,000)
Illustration 11
H Ltd. and S Ltd. provide the following information as at 31st March,20X2:
H Ltd. S Ltd.
` `
PPE 1,00,000 1,30,000
Investments (8,000 equity shares of S Ltd.) 1,26,000
Current Assets 74,000 70,000

Share capital (Fully paid equity shares of `10 each) 1,50,000 1,00,000
Profit and loss account 50,000 40,000
Trade Payables 1,00,000 60,000

Additional information:
H Ltd. acquired the shares of S Ltd. on 1-7-20X1 and Balance of profit and loss
account of S Ltd. on 1-4-20X1 was 30,000.
Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st March,
20X2.
Solution
Holding Co. : 8,000 (80%)
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd.
as at 31st March, 20X2
Note No Amount (`)

I EQUITY AND LIABILITYES
1 Shareholder’s Fund
(b) Reserve and Surplus 2 56,000
2 Minority interest 3 28,000
3 Current Liabilities
(a) Trade payables 4 1,60,000
Total 3,94,000
II ASSETS
1 Non-Current Assets:
PPE 5 2,30,000
Intangible Asset 6 20,000
2 Current Assets 7 1,44,000
Total 3,94,000

Notes to Accounts
Amount
(`)
1 Share capital 1,50,000

15,000 Equity Shares @ `10 each
2 Reserve and Surplus
Profit and loss account (` 50,000+ 80% of 9/12 x 10,000) 56,000
3 Minority Interest
Share capital (20% of ` 1,00,000) 20,000
Share in Profit and loss account (` 40,000 X 20%) 8,000 28,000
4 Trade payables
H Ltd. 1,00,000
S Ltd. 60,000
1,60,000
5 PPE
H Ltd. 1,00,000
S Ltd. 1,30,000
2,30,000
6 Intangible Asset
Cost of Investment 1,26,000
Less: Paid up value of shares (80% of ` 1,00,000)
Share in pre-acquisition profits (80,000)
80% of [30,000+3/12(40,000-30,000)] (26,000)
Goodwill 20,000
7 Current Assets
H Ltd. 74,000
S Ltd. 70,000
1,44,000

Illustration 12
From the Balance Sheets and information given below, prepare Consolidated
Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31 st March. Virat Ltd. holds 80%
of Equity Shares in Anushka Ltd. since its (Anushka Ltd.’s) incorporation.
Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31st March, 20X1
Particulars Note Virat Ltd. Anushka Ltd.

No. (` ) (` )
I. Equity and Liabilities

(1) Shareholder's Funds
(a) Share Capital 1 6,00,000 4,00,000
(b) Reserves and Surplus 2 1,00,000 1,00,000
(2) Non-current Liabilities
Long Term Borrowings 2,00,000 1,00,000
(3) Current Liabilities
(a) Trade Payables 1,00,000 1,00,000
Total 10,00,000 7,00,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 4,00,000 3,00,000
Equipment
(b) Non-current 3 3,20,000 -
investments
(2) Current Assets
(a) Inventories 1,60,000 2,00,000
(b) Trade Receivables 80,000 1,40,000
(c) Cash & Cash Equivalents 40,000 60,000
Total 10,00,000 7,00,000

Notes to Accounts
Particulars (`) Virat Ltd. Anushka Ltd.
(` ) (` )
1. Share capital
60,000 equity shares of ` 10 each fully

paid up
6,00,000 --
40,000 equity shares of ` 10 each fully
paid up
-- 4,00,000
Total 6,00,000 4,00,000
2. Reserves and Surplus
General Reserve 1,00,000 1,00,000

Total 1,00,000 1,00,000
3. Non-current investments
Shares in Anushka Ltd 3,20,000 --
Solution
Consolidated balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd.
Particulars Note Amount (`)
I EQUITY AND LIABILITIES:

(1) Shareholders’ Funds:
(b) Reserve and Surplus 2 1,80,000

(2) Minority Interest 3 1,00,000
(3) Non-Current Liabilities:
Long Term Borrowings 4 3,00,000

(4) Current Liabilities:
Trade Payables 5 2,00,000
Total 13,80,000
II ASSETS:
(1) Non-Current Assets
Property, Plant & Equipment 6 7,00,000
(2) Current Assets:
(a) Inventories
(b) Trade receivables 7 3,60,000
(c) Cash and Cash Equivalents 8 2,20,000
9 1,00,000
Total 13,80,000
Notes to Accounts
Particulars ` `
1. Share capital
60,000 equity shares of `10 each fully paid up 6,00,000
General Reserve 1,00,000
Add: General reserve of Anushka Ltd (80%) 80,000
Total 1,80,000
3. Minority interest
20% share in Anushka Ltd (WN 3) 1,00,000
4 Long term borrowings
Long term borrowings of Virat 2,00,000
Add: Long term borrowings of Anushka 1,00,000
Total 3,00,000

5. Trade payables
Trade payables of Virat 1,00,000
Add: Trade payables of Anushka 1,00,000
Total 2,00,000
6. Property, Plant and Equipment (PPE)
PPE of Virat Ltd 4,00,000
Add: PPE of Anushka Ltd 3,00,000
Total 7,00,000
7. Inventories
Inventories of Virat Ltd 1,60,000
Add: Inventories of Anushka Ltd 2,00,000
Total 3,60,000
8. Trade receivables
Trade receivables of Virat Ltd 80,000
Add: Trade receivables of Anushka Ltd 1,40,000
Total 2,20,000
9 Cash and cash equivalents
Cash and cash equivalents of Virat Ltd 40,000
Add: Cash and cash equivalents of Anushka Ltd 60,000
Total 1,00,000

Working Notes:
1. Basic Information
Company Status Dates Holding Status
Holding Co. = Virat Ltd. Acquisition: Holding Company = 80%

Anushka’s
Subsidiary = Anushka Minority Interest = 20%
Incorporation
Ltd.
Consolidation:
31st March, 20X1
2. Analysis of General Reserves of Anushka Ltd

Since Virat holds shares in Anushka since its incorporation, the entire
Reserve balance of `1,00,000 will be Revenue.
3. Consolidation of Balances
Holding- 80%, Total Minority Holding Company

Minority - Interest
20%
Equity Capital 4,00,000 80,000 3,20,000 -

General
Reserves 1,00,000 20,000 Nil (pre-acq) 80,000 (post-acq)
Total 1,00,000 3,20,000 80,000

Cost of
Investment (3,20,000) -
Goodwill/capit
NIL
al reserve
Parent’s 1,00,000
Balance
Amount for 1,80,000
Consolidated
Balance Sheet

Illustration 13
From the following balance sheets of H Ltd. And its subsidiary S Ltd. drawn up at
31st March, 20X1, prepare a consolidated balance sheet as at that date, having
regard to the following:
(i) Reserves and Profit and Loss Account of S Ltd. stood at ` 25,000 and ` 15,000
respectively on the date of acquisition of its 80% shares by H Ltd. on 1st April,
20X0.
(ii) Machinery (Book-value ` 1,00,000) and Furniture (Book value ` 20,000) of
S Ltd. were revalued at ` 1,50,000 and ` 15,000 respectively on 1 st April, 20X0
for the purpose of fixing the price of its shares. [Rates of depreciation
computed on the basis of useful lives: Machinery 10%, Furniture 15%.]
Balance Sheet of H Ltd. and S Ltd. as at 31 st March, 20X1

Particulars Note H Ltd. (`) S Ltd. (`)
No.

(1) Shareholder’s Funds
(a) Share Capital 1 6,00,000 1,00,000
(a) Trade Payables 1,50,000 57,000
Total 10,50,000 2,57,000
II. Assets
(a) Property, Plant and 3 4,50,000 1,07,000
Equipment
(b) Other non- current 4 6,00,000 1,50,000
investments
Total 10,50,000 2,57,000

Notes to Accounts
` H Ltd. S Ltd.
(` ) (` )
1. Share capital
6,000 equity shares of ` 100 each, fully paid 6,00,000 --

up
1,000 equity shares of ` 100 each, fully paid
up
-- 1,00,000
Total
6,00,000 1,00,000
General reserves 2,00,000 75,000

Profit and loss account 25,000
1,00,000
Total 3,00,000 1,00,000
3. Property, Plant and Equipment
Machinery 3,00,000 90,000
Furniture 1,50,000 17,000
Total 4,50,000 1,07,000
4. Other Non-current investments
Non-current Investments 4,40,000 1,50,000

Shares in S Ltd.
1,60,000 --
(800 shares at `200 each)
6,00,000 1,50,000
Total

Solution
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
Particulars Note (`)

No.


(b) Reserves and Surplus 2 3,44,600
(2) Minority Interest 3 48,150

(a) Trade Payables 2,07,000
Total 11,99,750
II. Assets
(a) Property, Plant and Equipment 4 5,97,750
(b) Intangible assets 5 12,000
(c) Other non-current investments 6 5,90,000
Total 11,99,750
Notes to Accounts
`
1. Share capital
6,000 equity shares of ` 100 each,

fully paid up
6,00,000
Total 6,00,000

Reserves 2,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition reserves (W.N.3) 40,000 2,40,000
Profit and Loss Account 1,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition profits (W.N.4) 4,600 1,04,600
Total 3,44,600
3. Minority interest in S Ltd. (WN 5) 48,150
4. Property, plant and equipment
Machinery
H. Ltd. 3,00,000
S Ltd. 1,00,000
Add: Appreciation 50,000
1,50,000
Less: Depreciation (1,50,000 X 10%)* (15,000) 1,35,000
Furniture
H. Ltd. 1,50,000
S Ltd. 20,000
Less: Decrease in value (5,000)
15,000
Less: Depreciation (15,000 X 15%)* (2,250) 12,750 5,97,750
5. Intangible assets
Goodwill [WN 6] 12,000
6. Other non-current investments
H Ltd. 4,40,000
S Ltd. 1,50,000
Total 5,90,000
* As an alternative manner of presentation, the solution contains only the
‘additional depreciation’.

Working Notes:
1. Pre-acquisition profits and reserves of S Ltd. `

Reserves 25,000
Profit and Loss Account 15,000
40,000
H Ltd.’s = 4/5 (or 80%) × 40,000 32,000
Minority Interest= 1/5 (or 20%) × 40,000 8,000
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery ` (1,50,000 – 1,00,000) 50,000
Less: Loss on Furniture ` (20,000 – 15,000) 5,000
Net Profit on revaluation 45,000

H Ltd.’s share 4/5 × 45,000 36,000
Minority Interest 1/5 × 45,000 9,000
3. Post-acquisition reserves of S Ltd.

Post-acquisition reserves (Total reserves less pre-acquisition 50,000
reserves = ` 75,000 – 25,000)
H Ltd.’s share 4/5 × 50,000 40,000
Minority interest 1/5 × 50,000 10,000
4. Post -acquisition profits of S Ltd.
Post-acquisition profits (Profit & loss account balance less 10,000

pre-acquisition profits = ` 25,000 – 15,000)
Add: Excess depreciation charged on furniture @ 15%
on ` 5,000 i.e. (20,000 – 15,000) 750

10,750

Less: Under depreciation on machinery @ 10%
on ` 50,000 i.e. (1,50,000 – 1,00,000) (5,000)
Adjusted post-acquisition profits 5,750
H Ltd.’s share 4/5 × 5,750 4,600
Minority Interest 1/5 × 5,750 1,150
5. Minority Interest
Paid-up value of (1,000 – 800) = 200 shares
held by outsiders i.e. 200 × ` 100 (or 1,00,000 X 20%) 20,000
Add: 1/5th share of pre-acquisition profits and reserves 8,000
1/5th share of profit on revaluation 9,000
1/5th share of post-acquisition reserves 10,000
1/5th share of post-acquisition profit 1,150
48,150
6. Cost of Control or Goodwill
Price paid by H Ltd. for 800 shares (A) 1,60,000
Intrinsic value of the shares-
Paid-up value of 800 shares held by H Ltd. i.e. 800 × ` 100 80,000
(or 1,00,000 X 80%)
Add: 4/5th share of pre-acquisition profits and reserves 32,000
4/5th share of profit on the revaluation 36,000
Intrinsic value of shares on the date of acquisition (B) 1,48,000
Cost of control or Goodwill (A – B) 12,000
C. ELIMINATION OF INTRA-GROUP TRANSACTIONS

Consolidated Financial Statements reflect the financial position and operations of
the group as a single entity. Accordingly, the statements must contain only those
transactions and balances with entities ‘external’ to the group, thereby requiring
elimination of intra-group transactions.

In order to present financial statements for the group in a consolidated format,

the effect of transactions between group enterprises should be eliminated. Para
16 of AS 21 states that intragroup balances and intragroup transactions and
resulting unrealized profits should be eliminated in full. Unrealized losses
resulting from intragroup transactions should also be eliminated unless cost
cannot be recovered.
Liabilities due to one group enterprise by another will be set off against the
corresponding asset in the other group enterprise’s financial statements; sales
made by one group enterprise to another should be excluded both from turnover
and from cost of sales or the appropriate expense heading in the consolidated
statement of profit and loss.
To the extent that the buying enterprise has further sold the goods in question to
a third party, the eliminations to sales and cost of sales are all that is required,
and no adjustments to consolidated profit or loss for the period, or to net assets,
are needed. However, to the extent that the goods in question are still o n hand at
year end, they may be carried at an amount that is in excess of cost to the group
and the amount of the intra-group profit must be eliminated, and assets are
reduced to cost to the group.
For transactions between group enterprises, unrealized profits resulting from
intra-group transactions that are included in the carrying amount of assets, such
as inventories and tangible fixed assets, are eliminated in full. The requirement to
eliminate such profits in full applies to the transactions of all subsidiaries that are
consolidated – even those in which the group’s interest is less than 100%.
Unrealized profit in inventories: Where a group enterprise sells goods to

another, the selling enterprise, as a separate legal enterprise, records profits
made on those sales. If these goods are still held in inventory by the buying
enterprise at the year end, the profit recorded by the selling enterprise, when
viewed from the standpoint of the group as a whole, has not yet been earned,
and will not be earned until the goods are eventually sold outside the group. On
consolidation, the unrealized profit on closing inventories will be eliminated from
the group’s profit, and the closing inventories of the group will be recorded at
cost to the group.

Here, the point to be noted is that one has to see whether the intragroup
transaction is “upstream” or “down-stream”. Upstream transaction is a
transaction in which the subsidiary company sells goods to holding company.
While in the downstream transaction holding company is the seller and
subsidiary company is the buyer.
Sells goods Co.

Subsidiary
Holding Co. Downstream Sales
to Co.
Sells goods Co.

Subsidiary Holding Co. Upstream Sales
Co. to
In the case of upstream transaction, since the goods are sold by the subsidiary to
holding company; profit is made by the subsidiary company, which is ultimately
shared by the holding company and the minority shareholders. In such a
transaction, if some goods remain unsold at the balance sheet date, the
unrealized profit on such goods should be eliminated from minority interest as
well as from consolidated profit on the basis of their share-holding besides
deducting the same from unsold inventory.
But in the case of downstream transaction, the whole profit is earned by the
holding company, therefore, whole unrealized profit should be adjusted from
unsold inventory and consolidated profit and loss account only irrespective of the
percentage of the shares held by the parent.
Intra-group transaction
Upstream Downstream
Unrealised profit
Unrealised profit Corresponding Corresponding
eliminated from
eliminated from decrease of holding decrease of
holding and inventories company’s P&L in inventories
minority interest full

Unrealized profit on transfer of non-current asset: Similar to the treatment

described above for unrealized profits in inventories, unrealized inter-company
profits arising from intra-group transfers of fixed assets are also eliminated from
the consolidated financial statements.
Unrealized losses: Unrealized losses resulting from intra-group transactions that
are deducted in arriving at the carrying amount of assets are also eliminated
unless cost cannot be recovered.
Example:
If net realizable value (NRV) expected from sale of such goods is more than the
actual cost of the goods, then unrealized loss should be reversed during
consolidation process. However, if it is expected that NRV would not be sufficient
to recover the loss incurred on transfer of goods from one entity to another, the
unrealized loss should not be reversed.
Illustration 14
a. A Ltd. holds 80% of the equity capital and voting power in B Ltd. A Ltd. sells
inventories costing ` 180 lacs to B Ltd at a price of ` 200 lacs. The entire
inventories remain unsold with B Ltd. at the financial year end i.e. 31 March
20X1.
b. A Ltd. holds 75% of the equity capital and voting power in B Ltd. A Ltd.
purchases inventories costing ` 150 lacs from B Ltd at a price of ` 200 lacs.
The entire inventories remain unsold with A Ltd. at the financial year end i.e.
31 March 20X1.
Suggest the accounting treatment for the above mentioned transactions in the
consolidated financial statements of A Ltd. giving reference of the relevant
guidance/standard.
Solution
As per para 16 and 17 of AS 21, intragroup balances and intragroup transactions
and resulting unrealized profits should be eliminated in full. Unrealized losses
resulting from intragroup transactions should also be eliminated unless cost
cannot be recovered.

Intragroup balances and intragroup transactions, including sales, expenses and
dividends, are eliminated in full. Unrealized profits resulting from intragroup
transactions that are included in the carrying amount of assets, such as inventory
and fixed assets, are eliminated in full. Unrealized losses resulting from intragroup
transactions that are deducted in arriving at the carrying amount of assets are
also eliminated unless cost cannot be recovered.
One also needs to see whether the intragroup transaction is “upstream” or

“down-stream”. Upstream transaction is a transaction in which the subsidiary
company sells goods to holding company. While in the downstream transaction,
holding company is the seller and subsidiary company is the buyer.
In the case of upstream transaction, since the goods are sold by the subsidiary to
holding company; profit is made by the subsidiary company, which is ultimately
shared by the holding company and the minority shareholders. In such a
transaction, if some goods remain unsold at the balance sheet date, the
unrealized profit on such goods should be eliminated from minority interest as
well as from consolidated profit on the basis of their share-holding besides
deducting the same from unsold inventory.
But in the case of downstream transaction, the whole profit is earned by the
holding company, therefore, whole unrealized profit should be adjusted from
unsold inventory and consolidated profit and loss account only irrespective of the
percentage of the shares held by the parent.
Using above mentioned guidance, following adjustments would be required:
a. This would be the case of downstream transaction. In the consolidated
profit and loss account for the year ended 31 March 20X1, entire transaction
of sale and purchase of ` 200 lacs each, would be eliminated by reducing
both sales and purchases (cost of sales).
Further, the unrealized profits of ` 20 lacs (i.e. ` 200 lacs – ` 180 lacs), would
be eliminated from the consolidated financial statements for financial year
ended 31 March 20X1, by reducing the consolidated profits/ increasing the
consolidated losses, and reducing the value of closing inventories as of 31
March 20X1.

b. This would be the case of upstream transaction. In the consolidated profit

and loss account for the year ended 31 March 20X1, entire transaction of
sale and purchase of ` 200 lacs each, would be eliminated by reducing both
sales and purchases (cost of sales).
Further, the unrealized profits of ` 50 lacs (i.e. ` 200 lacs – ` 150 lacs),
would be eliminated in the consolidated financial statements for financial
year ended 31 March 20X1, by reducing the value of closing inventories by `
50 lacs as of 31 March 20X1. In the consolidated balance sheet as of 31
March 20X1, A Ltd.’s share of profit from B Ltd will be reduced by ` 37.50
lacs (being 75% of ` 50 lacs) and the minority’s share of the profits of B Ltd
would be reduced by ` 12.50 lacs (being 25% of ` 50 lacs).
D. ALIGNMENT OF REPORTING DATES

The financial statements used in the consolidation should be drawn up to the
same reporting date. If it is not practicable to draw up the financial statements of
one or more subsidiaries to such date and, accordingly, those financial statements
are drawn up to different reporting dates, adjustments should be made for the
effects of significant transactions or other events that occur between those dates
and the date of the parent’s financial statements.
In any case, the difference between reporting dates should not be more than six
months.
The financial statements of the parent and its subsidiaries used in the preparation
of the consolidated financial statements are usually drawn up to the same date.
When the reporting dates are different, the subsidiary often prepares, for
consolidation purposes, statements as at the same date as that of the parent.
When it is impracticable to do this, financial statements drawn up to different

reporting dates may be used provided the difference in reporting dates is not
more than six months.
The consistency principle requires that the length of the reporting periods and
any difference in the reporting dates should be the same from period to period.

1.15 PREPARATION OF CONSOLIDATED

STATEMENT OF PROFIT AND LOSS
All the items of profit and loss account are to be added on line by line basis and
inter-company transactions should be eliminated from the consolidated figures.
For example, a holding company may sell goods or services to its subsidiary,
receive consultancy fees, commission, royalty etc. These items are included in
sales and other income of the holding company and in the expense items of the
subsidiary. Alternatively, the subsidiary may also sell goods or services to the
holding company. These inter-company transactions are to be eliminated in full.
If there remains any unrealized profit in the inventory, of any of the Group
Company, such unrealized profit is to be eliminated from the value of inventory to
arrive at the consolidated profit.
Illustration 15
H Ltd and its subsidiary S Ltd provide the following information for the year ended
31st March, 20X3:
H Ltd. S Ltd.
(` in lacs) (` in lacs)
Sales and other income 5,000 1,000
Increase in Inventory (closing less opening) 1,000 200
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50

Other Information:
H Ltd. sold goods to S Ltd. of ` 120 lacs at cost plus 20%. Inventory of S Ltd.
includes such goods valuing ` 24 lacs. Administrative expenses of S Ltd. include
` 5 lacs paid to H Ltd. as consultancy fees. Selling and distribution expenses of
H Ltd. include ` 10 lacs paid to S Ltd. as commission.
H Ltd. holds 80% of equity share capital of ` 1,000 lacs in S Ltd. prior to 20X1-20X2.
H Ltd. took credit to its Profit and Loss Account, the proportionate amount of
dividend declared and paid by S Ltd. for the year 20X1-20X2.
Prepare a consolidated statement of profit and loss..

Solution
Consolidated statement of profit and loss of H Ltd. and its subsidiary S Ltd.
for the year ended on 31st March, 20X3
Particulars Note No. ` in Lacs
I. Revenue from operations 1 5,865
II. Total Income 5,865
III. Expenses
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished goods 3 (1,196)
Employee benefit expense 4 950
Finance cost 5 150
Depreciation and amortization expense 6 150
Other expenses 7 535
Total expenses 1,769
IV. Profit before tax (II-III) 4,096

Notes to Accounts
` in Lacs ` in Lacs
1. Revenue from operations

Sales and other income
H Ltd. 5,000
S Ltd. 1,000
6,000
Less: Inter-company sales (120)

Consultancy fees received by H Ltd. from S Ltd. (5)
Commission received by S Ltd. from H Ltd. (10) 5,865
2. Cost of material purchased/consumed

H Ltd. 800
S Ltd. 200
1,000
Less: Purchases by S Ltd. from H Ltd. (120) 880
Direct expenses (Production)
H Ltd. 200
S Ltd. 100 300
1,180
3. Changes of inventories of finished goods

H Ltd. 1,000
S Ltd. 200
20
(4) 1,196
Less: Unrealized profits ` 24 lacs × 120

4. Employee benefits and expenses

Wages and salaries:
H Ltd. 800
S Ltd. 150 950
5. Finance cost
Interest:
H Ltd. 100
S Ltd. 50 150
6. Depreciation
H Ltd. 100
S Ltd. 50 150
7. Other expenses
Administrative expenses
H Ltd. 200
S Ltd. 100
Less: Consultancy fees received by H Ltd. from S Ltd. (5) 295
Selling and distribution Expenses:
H Ltd. 200
S Ltd. 50
Less: Commission received by S Ltd. from H Ltd. (10) 240
535
1.16 PREPARATION OF CONSOLIDATED CASH

FLOW STATEMENT
As per AS 21, Consolidated cash flow statement is presented in case a parent
presents its own cash flow statement.
For the purpose of preparation of consolidated cash flow statement, all the items
of cash flow from operating activities, investing activities and financing activities
are to be added on line by line basis and from the consolidated items, inter -
company transactions should be eliminated. Below given is an illustrative
consolidated cash flow statement with hypothetical figures:

Consolidated Cash Flow Statement (Illustrative only)
(` in million)
A B Total
Company Company
Cash Flows from Operating Activities
Change in Reserve 8 2 10
Change in P & L A/c - 1 1
Dividend Paid 22 - 22
Tax Provision 20 1 21
Depreciation 10 5 15
Interest (10) 10 -
50 19 69
Less: Tax payment (20) (1) (21)
30 18 48
Working capital adjustment (13) 12 (1)
17 30 47
Cash Flows from Investment Activities
Sale of fixed assets 30 - 30
Purchase of fixed assets (30) (20) (50)
- (20) (20)
Cash Flows from Financing Activities (5) (10) (15)
(C)
Net cash flows 12 - 12

1.17 UNIFORM ACCOUNTING POLICIES

Para 20 of AS 21 states that consolidated financial statements shall be prepared
using uniform accounting policies for like transactions and other events in similar
circumstances.
If any company in the same group uses accounting policies other than those
adopted in consolidated financial statements for like transactions and events in
similar circumstances, appropriate adjustments are made to its financial
statements when they are used in preparing the consolidated financial
statements.
If it is not practicable to use uniform accounting policies in preparing the
consolidated financial statements, the fact should be disclosed together with the
proportions of items to which different accounting policies have been applied.
For example, if the subsidiary company follows weighted average method for
valuation of inventories and the holding company follows FIFO method, the
financial statements of subsidiary company should be restated by adjusting the
value of inventories to bring the same in line with the valuation procedure
adopted by the holding company. After that consolidation should be done.
Illustration 16
Subsidiary B Ltd. provides the following balance sheet:
Particulars Note 20X0 20X1

No. (` ) (` )
(a) Share Capital 1 5,00,000 5,00,000
(a) Short term borrowings 3 -- 1,70,000
(b) Trade Payables 4,90,000 4,94,000
(c) Short-term provisions 4 3,10,000 4,30,000
Total 15,86,000 23,08,000

II. Assets
Equipment
(b) Non-current Investment 4,00,000
(2) Current assets

(a) Inventories 5,97,000 7,42,000
(b) Trade Receivables 5,94,000 8,91,000
(c) Cash & Cash Equivalents 51,000 3,000
(d) Other current assets 6 72,000 48,000
Total 15,86,000 23,08,000
20X0 20X1
(` ) (` )
1. Share capital
5,000 equity shares of `10 each, fully paid up 5,00,000 5,00,000
General Reserves 2,86,000 7,14,000
3. Short term borrowings
Bank overdraft -- 1,70,000
4. Short term provisions
Provision for taxation 3,10,000 4,30,000
Cost 3,20,000 3,20,000
Less: Depreciation (48,000) (96,000)
Total 2,72,000 2,24,000
6. Other current Assets
Prepaid expenses 72,000 48,000

Also consider the following information:

(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the
accounting year.
(b) A Ltd. values inventory on weighted average basis while B Ltd. used FIFO
basis. To bring B Ltd.’s values in line with those of A Ltd, its value of inventory
is required to be reduced by `12,000 at the end of 20X0 and ` 34,000 at the
end of 20X1.
(c) B Ltd. deducts 1% from Trade Receivables as a general provision against
doubtful debts.
(d) Prepaid expenses in B Ltd. include advertising expenditure carried forward of
` 60,000 in 20X0 and ` 30,000 in 20X1, being part of initial advertising
expenditure of ` 90,000 in 20X0 which is being written off over three years.
Similar amount of advertising expenditure of A Ltd. has been fully written off
in 20X0.
Restate the balance sheet of B Ltd. as at 31 st December, 20X1 after considering the
above information, for the purpose of consolidation. Would restatement be
necessary to make the accounting policies adopted by A Ltd. and B Ltd. uniform.
Solution
As per para 20 and 21 of AS 21, Consolidated financial statements:
Consolidated financial statements should be prepared using uniform accounting
policies for like transactions and other events in similar circumstances. If it is not
practicable to use uniform accounting policies in preparing the consolidated
financial statements, that fact should be disclosed together with the proportions
of the items in the consolidated financial statements to which the different
accounting policies have been applied.
If a member of the group uses accounting policies other than those adopted in
the consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to its financial statements when
they are used in preparing the consolidated financial statements.
Accordingly in the given case, restatement would be required to make the

accounting policies of A Ltd and B Ltd uniform.

Adjusted reserves of B Ltd.:
` `
Reserves as given 7,14,000
Add: Provision for doubtful debts
{[8,91,000 / 99 X 100]-8,91,000} 9,000
7,23,000
Less: Reduction in value of Inventory 34,000
Advertising expenditure to be written off 30,000 (64,000)
Adjusted reserves 6,59,000
Note: No adjustment would be required in respect of opening inventory of B Ltd

as that will not have any impact on P&L.
Restated Balance Sheet of B Ltd.

as at 31st December, 20X1
Particulars Note No. (`)

(a) Short term borrowings 3 1,70,000
(b) Trade Payables 4,94,000
(c) Short-term provision 4 4,30,000
Total 22,53,000
II. Assets
(a) Property, Plant and Equipment 5 2,24,000
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 6 7,08,000
(b) Trade Receivables 7 9,00,000

(c) Cash & Cash Equivalents 3,000

(d) Other current assets 8 18,000
Total 22,53,000
Notes to Accounts
20X1
(`)
1. Share capital
5,000 equity shares of Rs 10 each, fully paid up 5,00,000
General Reserves (refer to WN) 6,59,000
Bank overdraft 1,70,000
Provision for taxation 4,30,000
Cost 3,20,000
Less: Depreciation (96,000)
Total 2,24,000
6. Inventory
Actual inventory 7,42,000
Less: Change in method of valuation (34,000)
Total 7,08,000
Actual trade receivables 8,91,000
Add: Adjustment for provision 9,000
Total 9,00,000
8. Other current Assets
Prepaid expenses 48,000

1.18 TREATMENT OF SUBSIDIARY COMPANY

HAVING PREFERENCE SHARE CAPITAL
While preparing CFS, outstanding cumulative preference shares issued by a
subsidiary are considered in the same manner as any other liability, such as
debentures etc. Accordingly, the cost associated with such cumulative preference
shares needs to be adjusted for.
Therefore, while computing its share of profits or losses of the subsidiary, the
parent should make adjustments in respect of preference dividends on
outstanding cumulative preference shares issued by a subsidiary and held outside
the group since, for the group, such preference shares represent external
liabilities. It would be appropriate for the parent to compute its share of profits or
losses after adjusting for subsidiary’s cumulative preference dividends, whether or
not profits are available or dividends have been declared.
However, in case of non-cumulative preference shares, no such adjustment is
required unless the dividend is actually received.
SUMMARY
• “Holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies; “subsidiary
company” or “subsidiary”, in relation to any other company (that is to say
the holding company), means a company in which the holding company—
o controls the composition of the Board of Directors; or
o exercises or controls more than one-half of the total share capital
either at its own or together with one or more of its subsidiary
companies: Provided that such class or classes of holding companies
as may be prescribed shall not have layers of subsidiaries beyond such
numbers as may be prescribed.
• ‘Total share capital’, as defined in section 2(87) (ii) above, has been further
clarified by the Rule 2(1)(r) of the Companies (Specification of Definitions
Details) Rules, 2014. As per the Rule, total share capital includes
o paid up equity share capital
o convertible preference share capital.

• Consolidated financial statements are prepared and presented by a

parent/holding enterprise to provide financial information about a parent
and its subsidiary (ies) as a single economic entity.
• Distinction must be made from the point of view of the holding company,
between revenue and capital profit of the subsidiary. In the absence of
information, profits of a year may be treated as accruing from day to day.
Preparation of Consolidated Statement of Profit and Loss
• All the revenue items are to be added on line by line basis and from the
consolidated revenue items, inter-company transactions should be
eliminated.
• If there remains any unrealized profit in the inventory of goods, of any of
the Group Company, such unrealized profit should be eliminated from the
value of inventory to arrive at the consolidated profit.
Preparation of Consolidated Cash Flow Statement
All the items of Cash flow from operating activities, investing activities and
financing activities are to be added on line by line basis and from the
consolidated items, inter-company transactions should be eliminated.
The financial statements used in the consolidation should be drawn up to the
same reporting date. If it is not practicable to draw up the financial statements of
one or more subsidiaries to such date and, accordingly, those financial statements
are drawn up to different reporting dates, adjustments should be made for the
effects of significant transactions or other events that occur between those dates
and the date of the parent’s financial statements.
In any case, the difference between reporting dates should not be more than six
months.

TEST YOUR KNOWLEDGE

MCQs
1. Minority interest should be presented in the consolidated balance sheet
(a) As a part of liabilities.

(b) As a part of equity of the parent’s shareholders.
(c) Separately from liabilities and the equity of the parent’s shareholders.
(d) As a part of assets.
2. Minority of the subsidiary is entitled to
(a) Capital profits of the subsidiary company.
(b) Revenue profits of the subsidiary company.
(c) Both capital and revenue profits of the subsidiary company.
(d) Neither capital nor revenue profits of the subsidiary..
3. In consolidation of accounts of holding and subsidiary company _________ is
eliminated in full.
(a) Current liabilities of subsidiary company.
(b) Reserves and surplus of both holding and subsidiary company.
(c) Mutual indebtedness.
(d) Nothing.
4. In consolidated balance sheet, the share of the outsiders in the net assets of
the subsidiary must be shown as
(a) Minority interest.
(b) Capital reserve.

(c) Current liability.
(d) Current assets.
5. Provision for Tax made by the subsidiary company will appear in the
consolidated balance sheet as an item of

(a) Current liability.

(b) Revenue profit.
(c) Capital profit.
(d) Current assets.
Practical Questions
6. Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for
` 2,10,000. The issued capital of Power Ltd., on 1st January, 20X1 was `
1,50,000 and the balance in the Profit & Loss Account was ` 90,000. During
the year ended 31st December, 20X1, Power Ltd. earned a profit of ` 30,000
and at year end, declared and paid a dividend of ` 22,500. What is the
amount of minority interest as on 1st January, 20X1 and 31st December,
20X1? Also compute goodwill/ capital reserve at the date of acquisition.
7. King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1
at a cost of ` 140 lakhs. The following information is available from the
balance sheet of Queen Ltd. as on 31st March, 20X1:
` in lakhs
Property, plant and equipment 240
Investments 110
Current Assets 140

Loans & Advances 30
15% Debentures 180
Current Liabilities 100
The following revaluations have been agreed upon (not included in the above
figures):
Property, plant and equipment- up by 20% and Investments- down by 10%.
King Ltd. purchased the shares of Queen Ltd. @ `20 per share (Face
value - `10).
Calculate the amount of goodwill/capital reserve on acquisition of shares of

Queen Ltd.

8. From the following information, determine Minority Interest on the date of
acquisition and on the date of consolidation in each case:
Case Subsidiary % of Cost Date of Consolidation date

Company Share Acquisition
owned
01-01-20X1 31-12-20X1
Share Profit Share Profit and

Capital and Loss Capital Loss A/c
A/c
` ` ` `
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000
9. A Ltd acquired 1,600 ordinary shares of `100 each of B Ltd on 1st July, 20X1.
On
31st December, 20X1, the balance sheets of the two companies were as given
below:
Balance Sheet of A Ltd. and its subsidiary, B Ltd.
Particulars Note A Ltd. B Ltd.

No. (` ) (` )

(a) Share Capital 1 5,00,000 2,00,000


(a) Trade Payables 47,100 17,400

(b) Short term borrowings 3 80,000
Total 9,24,300 3,99,400
II. Assets

Equipment
(b) Non-current Investments 5 3,40,000 --

(2) Current assets
(a) Inventories 1,20,000 36,400
(b) Trade receivables 59,800 40,000

(c) Cash & Cash equivalents 6 14,500 8,000
Total 9,24,300 3,99,400
Notes to Accounts
A Ltd. B Ltd.
` `
1. Share Capital
5,000 shares of ` 100 each, fully paid up 5,00,000 -
2,000 shares of ` 100 each, fully paid up - 2,00,000
Total 5,00,000 2,00,000
General Reserves 2,40,000 1,00,000
Profit & loss 57,200 82,000
Total 2,97,200 1,82,000
Bank overdraft 80,000 --
4. Property plant and equipment
Land and building 1,50,000 1,80,000

Plant & Machinery 2,40,000 1,35,000
Total 3,90,000 3,15,000
5. Non-current Investments
Investment in B Ltd (at cost) 3,40,000 --
6. Cash & Cash equivalents
Cash 14,500 8,000
The Profit & Loss Account of B Ltd. showed a credit balance of `30,000 on
1st January, 20X1 out of which a dividend of 10% was paid on 1st August,
20X1; A Ltd. credited the dividend received to its Profit & Loss Account. The
Plant & Machinery which stood at ` 1,50,000 on 1st January, 20X1 was
considered as worth ` 1,80,000 on 1st July, 20X1; this figure is to be
considered while consolidating the Balance Sheets. The rate of depreciation
on plant & machinery is 10% (computed on the basis of useful lives).
Prepare consolidated Balance Sheet as at 31 st December, 20X1.
10. On 31st March, 20X1, the Balance Sheets of H Ltd. and its subsidiary S Ltd.
stood as follows:
Balance Sheet of H Ltd.
and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note H Ltd. S Ltd.

No. (` in Lacs) (` in Lacs)
(a) Share Capital 1 12,000 4,800
(b) Reserves and Surplus 2 5,499 3,000
(a) Trade payables 3 1,833 1,014
(b) Short term provisions 4 855 394
(c) Other current liabilities 1,200 -
(Dividend payable)
Total 21,387 9,208

II. Assets
Property, Plant and Equipment 5 9,468 5,486
Non-current Investments 3,000
(Shares in S Ltd.)
(2) Current assets
(a) Inventories 3,949 1,956
(b) Trade receivables 6 2,960 1,562
(c) Cash and cash equivalents 1,490 204
(d) Short term loans and 7 520
advances
Total 21,387 9,208
Notes to Accounts
H Ltd. S Ltd.
1. Share Capital
Authorized share capital 15,000 6,000
Equity shares of ` 10 each, fully paid up
Issued and Subscribed:
Equity shares of ` 10 each, fully paid up 12,000 4,800
2. Reserves and surplus
General Reserve 2,784 1,380
Profit and Loss Account: 2,715 1,620
Total 5,499 3,000
3. Trade Payables
Creditors 1,461 854
Bills Payable 372 160
1,833 1,014

Provision for Taxation 855 394
Land and Buildings 2,718 -
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Total 9,468 5,486
Debtors 2,600 1,363
Bills Receivable 360 199
Total 2,960 1,562
7. Short term loans and advances
Sundry Advances 520 --
The following information is also provided to you:

(a) H Ltd. purchased 180 lakh shares in S Ltd. on 31st March, 20X0 when the
balances of General Reserve and Profit and Loss Account of S Ltd. stood
at ` 3,000 lakh and ` 1,200 lakh respectively.
(b) On 1st April, 20X0, S Ltd. declared a dividend @ 20% for the year ended
31st March, 20X0. H Ltd. credited the dividend received by it to its Profit
and Loss Account.
(c) On 1st January, 20X1, S Ltd. issued 3 fully paid-up bonus shares for
every 5 shares held out of balances of its general reserve as on
31st March, 20X0.
(d) On 31st March, 20X1, all the bills payable in S Ltd.’s balance sheet were
acceptances in favour of H Ltd. But on that date, H Ltd. held only ` 45
lakh of these acceptances in hand, the rest having been endorsed in
favour of its trade payables.
(e) On 31st March, 20X1, S Ltd.’s inventory included goods which it had
purchased for ` 100 lakh from H Ltd. which made a profit @ 25% on
cost.

Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at

31st March, 20X1.
ANSWERS/SOLUTION
MCQ
1. (c) 2. (c) 3. (c) 4. (a) 5. (a)
Practical Questions
6. Total dividend paid is ` 22,500 (out of post-acquisition profits), hence
dividend received by Hemant will be credited to P & L account. Hemant
Ltd.’s share of dividend = ` 22,500 X 80% = ` 18,000
Goodwill on consolidation (at the date of ` `
acquisition):
Cost of shares 2,10,000
Less: Face value of capital i.e. 80% of capital 1,20,000
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Goodwill 18,000
Minority interest on:
- 1st January, 20X1:
20% of ` 2,40,000 [1,50,000 + 90,000] 48,000
- 31st December, 20X1:
49,500
20% of ` 2,47,500 [1,50,000 + 90,000 + 30,000 –
22,500]
7. Revalued net assets of Queen Ltd. as on 31st March, 20X1
PPE [240 X 120%] 288
Investments [110 X 90%] 99
Current Assets 140

Loans and Advances 30

Total Assets after revaluation 557
Less: 15% Debentures 180.0
Current Liabilities 100.0 (280)
Equity / Net Worth 277
King Ltd.’s share of net assets (70% of 277) 193.9
King Ltd.’s cost of acquisition of shares of Queen
Ltd.
(`140 lakhs) (140)
Capital reserve 53.9
8. Minority Interest = Equity attributable to minorities

Equity is the residual interest in the assets of an enterprise after deducting
all its liabilities i.e. in this case, it should be equal to Share Capital + Profit &
Loss A/c
A = Share capital on 1.1.20X1
B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1
Minority Minority Minority interest as

% Shares interest as at at the date of
Owned the date of consolidation
acquisition
[E] [E] x [A + B] ` [E] X [C + D] `
Case A [100-90] 10 % 22,500 23,500
Case B [100-75] 25 % 50,000 40,000
Case C [100-70] 30 % 18,000 18,000
Case D [100-95] 5% 4,750 5,750

9. Consolidated Balance Sheet of A Ltd. and its subsidiary, B Ltd.

Particulars Note No. (`)

(2) Minority Interest 83,600
(a) Trade Payables 3 64,500
(b) Short term borrowings 4 80,000
Total 10,36,900
II. Assets
(a) Property, Plant and 5 7,41,000
Equipment
(b) Intangible assets 6 17,200
(2) Current assets
(a) Inventories 7 1,56,400
(b) Trade receivables 8 99,800
(c) Cash & Cash equivalents 9 22,500
Total 10,36,900
Notes to Accounts
`
1. Share Capital
5,000 shares of ` 100 each 5,00,000
Reserves 2,40,000
Profit & loss (Refer to W.N 8) 68,800
Total 3,08,800

3. Trade Payables
A Ltd. 47,100
Add: B Ltd 17,400
Total 64,500
Bank overdraft 80,000
Land and building- A Ltd 1,50,000
Add: Land and building- B Ltd 1,80,000 3,30,000
Plant & Machinery (Refer to W.N 7) 4,11,000
Total 7,41,000
6. Intangible assets
Goodwill (refer to W.N 6) 17,200
7. Inventories
A Ltd. 1,20,000
B Ltd. 36,400
Total 1,56,400
8 Trade Receivables
A Ltd. 59,800
B Ltd. 40,000
Total 99,800
9 Cash & Cash equivalents
Cash of A Ltd 14,500

Add: cash of B Ltd. 8,000
Total 22,500
Share holding Pattern

Total Shares of B Ltd 2,000 shares

Shares held by A Ltd 1,600 shares i.e. 80 %

Minority Shareholding 400 shares i.e. 20 %
Working Notes:
1. The dividend @ 10% on 1,600 shares - ` 16,000 received by A Ltd.
should have been credited to the investment A/c, being out of
pre-acquisition profits. A Ltd., must pass a rectification entry, viz.
Profit & Loss Account Dr. ` 16,000
To Investment ` 16,000
2. The Plant & Machinery of B Ltd. would stand in the books at
` 1,42,500 on 1st July, 20X1, considering only six months’
depreciation on ` 1,50,000 total depreciation being ` 15,000. The
value put on the assets being ` 1,80,000, there is an appreciation to
the extent of ` 37,500 (1,80,000 – 1,42,500).
3. Capital profits of B Ltd.
` `
Reserve on 1st January, 20X1 (Assumed there 1,00,000

is no movement in reserves during the year
and hence balance as on 1 st January 20X1 is
same as of 31 st December 20X1)
Profit & Loss Account Balance on 1st January, 30,000

20X1
Less: Dividend paid (20,000) 10,000
Profit for 20X1:

Total ` 82,000
Less: `10,000
` 72,000
Proportionate upto 1st July, 20X1 on time

basis (` 72,000/2) 36,000

Appreciation in value of Plant & Machinery 37,500
1,83,500
Less: 20% due to outsiders (36,700)
Holding company’s share 1,46,800
4. Revenue profits of B Ltd.:
Profit after 1st July, 20X1 [(82,000 – 10,000) x ½] 36,000

Less: Depreciation
10% depreciation on `1,80,000 for 6 months 9,000
Less: Depreciation already charged for 2 nd half
year on 1,50,000 (7,500) (1,500)
34,500
Less: 1/5 due to outsiders (6,900)
Share of A Ltd. 27,600
5. Minority interest:
Par value of 400 shares (2,00,000 X 20%) 40,000
Add: 1/5Capital Profits [WN 3] 36,700
1/5 Revenue Profits [WN 4] 6,900
83,600
6. Cost of Control:
Amount paid for 1,600 shares 3,40,000
Less: Dividend out of pre-acquisition profits (16,000) 3,24,000
Par value of shares 1,60,000
Capital Profits –share of A Ltd. [WN 3] 1,46,800 (3,06,800)
Cost of Control or Goodwill 17,200

7. Value of plant & Machinery:
2,40,000
B Ltd. 1,35,000
Add: Appreciation on 1st July, 20X1 [1,80,000
– (1,50,000 – 7,500)] 37,500
1,72,500
Add: Deprecation for 2 nd half charged on pre-
revalued value 7,500
Less: Depreciation on `1,80,000 for 6 months (9,000) 1,71,000
4,11,000
8. Profit & Loss Account (Consolidated):
A Ltd. as given 57,200

Less: Dividend transferred to Investment A/c (16,000) 41,200
Share of A Ltd. in revenue profits of B Ltd. 27,600
(WN 4)
68,800
10. Consolidated Balance Sheet of H Ltd.

and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note No. (` in Lacs)

(a) Share Capital 1 12,000
(b) Reserves and Surplus 2 7,159
(2) Minority Interest [W.N.6] 3,120
(a) Trade payables 3 2,802
(b) Short term provisions 4 1,249

(c) Other current liabilities 5 1,200
Total 27,530
II. Assets
Property, Plant and Equipment 6 14,954
(2) Current assets
(a) Inventories 7 5,885
(b) Trade receivables 8 4,477
(c) Short term loans and advances 9 520
(d) Cash and cash equivalents 10 1,694
Total 27,530
Notes to Accounts
1. Share Capital
Authorized share capital 15,000
Equity shares of `10 each, fully paid up
Issued and Subscribed:
Equity shares of ` 10 each, fully paid up 12,000
Total 12,000
2. Reserves and surplus
Capital Reserve (Note 5) 1,320
General Reserve (2,784 + 108) 2,892
Profit and Loss Account:
H Ltd. 2,715
Less: Dividend wrongly credited 360
Unrealized Profit 20 (380)
2,335
Add: Share in S Ltd.’s Revenue profits 612 2,947
Total 7,159

3. Trade payables
Creditors
H Ltd. 1,461
S Ltd. 854 2,315
Bills Payable
H Ltd. ` 372
S Ltd. ` 160
` 532
Less: Mutual owing ` (45) 487 2,802

Provision for Taxation
H Ltd. 855
S Ltd. 394
Total 1,249
5. Other current liabilities
Dividend payable
H Ltd. 1,200
Land and Buildings
H Ltd. 2,718
Plant and Machinery
H Ltd. ` 4,905
S Ltd. ` 4,900 9,805
Furniture and Fittings
H Ltd. ` 1,845
S Ltd. ` 586 2,431
Total 14,954

7. Inventories
Stock
H Ltd. 3,949
S Ltd. 1,956
5,905
Less: Unrealized profit (20) 5,885
Debtors
H Ltd. ` 2,600
S Ltd. ` 1,363 3,963
Bills Receivable
H Ltd. ` 360
S Ltd. ` 199
` 559
Less: Mutual Owing ` (45) 514 4,477
9. Short term loans and advances
Sundry Advances 520
10. Cash and cash equivalents
Cash and Bank Balances 1,694
Share holding pattern of S Ltd.

Shares as on 31st March, 20X1 (Includes bonus 480 lakh shares (4,800 lakhs/
shares issued on 1st January, 20X1) ` 10)
H Ltd.’s holding as on 1st April, 20X0 180 lakhs
Add: Bonus received on 1st January, 20X1 108 lakhs (180 / 5 × 3)
Total H Ltd.’s holding as on 31st March, 20X1 288 lakhs i.e. 60 %
[288/480×100]
Minority Shareholding 40%

Working Notes:
1. S Ltd.’s General Reserve Account
To Bonus to equity By Balance b/d 3,000
shareholders (WN-8) 1,800 By Profit and Loss A/c 180

To Balance c/d 1,380 (Balancing figure) _
3,180 3,180
2. S Ltd.’s Profit and Loss Account
To General Reserve By Balance b/d 1,200
[WN 1] 180 By Net Profit for the
To Dividend paid year* 1,200
(20% on `3,000 lakhs) 600 (Balancing figure)

To Balance c/d 1,620
2,400 2,400
*Out of ` 1,200 lakhs profit for the year, ` 180 lakhs has been transferred to
reserves.
3. Distribution of Revenue profits
` in lakhs
Revenue profits (W. N. 2) 1,200
Less: Share of H Ltd. 60% (720)
(General Reserve ` 108 + Profit and Loss Account ` 612)
Share of Minority Shareholders (40%) 480
Note: The question can also be solved by taking ` 1,020 lakhs as post
acquisition Profit and Loss balance and ` 180 lakhs as post acquisition
General Reserve balance. The final answer will be same.

4. Calculation of Capital Profits
` in lakhs
General Reserve on the date of acquisition less bonus 1,200

shares (` 3,000 – ` 1,800)
Profit and loss account on the date of acquisition less 600

dividend paid (` 1,200 – ` 600)
1,800
H Ltd.’s share = 60% of ` 1,800 lakhs = ` 1,080 lakhs

Minority interest = ` 1,800 – ` 1,080 = ` 720 lakhs
5. Calculation of capital reserve
` in lakhs
Paid up value of shares held (60% of `4,800) 2,880
Add: Share in capital profits [WN 4] 1,080

3,960
Less: Cost of shares less dividend received (` 3,000 – ` 360) (2,640)
Capital reserve 1,320
6. Calculation of Minority Interest
III III` in lakhs
40% of share capital (40% of ` 4,800) 1,920
Add: Share in revenue profits [WN 3] 480

Share in capital profits [WN 4] 720
3,120
7. Unrealized profit in respect of inventory

25

` 100 lakhs 125 = ` 20 lakhs

8. Computation of bonus to equity shareholders

` In lakhs
Shares as on 31 March 20X1 including bonus share
issued on 1 January 20X1 4,800
3 8
Or we can say these are 1 + or
5 5
4,800
i.e. Shares before bonus issue should have been = 3,000
8 /5
Accordingly, bonus issue would be (4,800-3,000) 1,800

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CHAPTER a

© The Institute of Chartered Accountants of India

1.1 CONCEPT OF GROUP, HOLDING COMPANY

© The Institute of Chartered Accountants of India

1. Purchasing specified number of shares i.e. ownership through voting power

(i) controls the composition of the Board of Directors; or

© The Institute of Chartered Accountants of India

A company shall be deemed to be a subsidiary company of the holding company

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Definitions as per Accounting Standard (AS) 21

© The Institute of Chartered Accountants of India

1.3 WHOLLY OWNED AND PARTLY OWNED

1. A wholly owned subsidiary In a partly owned subsidiary, all the

1.4 PURPOSE OF PREPARING THE

© The Institute of Chartered Accountants of India

CFS normally include consolidated balance sheet, consolidated statement of

The logic for presentation of Consolidated Financial Statements can be

Technically, Investments appearing in the balance sheet of Reliance Industries

© The Institute of Chartered Accountants of India

The consolidation of financial statements of the company shall be made in

Exemptions from preparation of CFS:

© The Institute of Chartered Accountants of India

(iii) its ultimate or any intermediate holding company files consolidated

It may be pertinent to note that in certain countries outside India, presentation of

© The Institute of Chartered Accountants of India

c. accounting for investments in joint ventures (governed by AS 13,

Note: AS 21 is mandatory if an enterprise presents consolidated financial

An enterprise may control the composition of the governing bodies of entities

For the purpose of this Standard, an enterprise is considered to control the

© The Institute of Chartered Accountants of India

a. a person cannot be appointed as director without the exercise in his

b. a person’s appointment as director follows necessarily from his

c. the director is nominated by that enterprise or a subsidiary thereof.

a. a person cannot be appointed as member of the governing body

b. a person’s appointment as member of the governing body follows

c. the member of the governing body is nominated by that other

Note: It is possible that an enterprise is controlled by two enterprises – one

© The Institute of Chartered Accountants of India

1.7 EXCLUSION FROM PREPARATION OF

(a) control is intended to be temporary because the subsidiary is acquired

The period of time, which is considered as “near future” as mentioned above,

© The Institute of Chartered Accountants of India

Conversely, if the relevant investment is acquired with an intention to its

© The Institute of Chartered Accountants of India

1.8 ADVANTAGES OF CONSOLIDATED

The main advantages of consolidation are given below:

(iii) Acquisition of subsidiary: The minority interest data of the consolidated

© The Institute of Chartered Accountants of India

starting point of bargaining at the time of acquisition of a subsidiary by the

1.9 COMPONENTS OF CONSOLIDATED

Consolidated Balance Sheet

Profit and Loss Account

Consolidated Cash Flow

Notes and statements and

 The consolidated financial statements are presented to the extent possible

© The Institute of Chartered Accountants of India

In addition, the consolidated financial statements shall disclose the information as

© The Institute of Chartered Accountants of India