FA3

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An Analysis of Consolidated and Parent-Only Financial Statements of Indian Companies

Introduction
Consolidated Financial Statements (CFS) refers to the financial statements presented by the
holding company which is related to its individual operations and also to the group as a
whole. The purpose of CFS is to present the financial statements of not only the parent (holding)
company but also its subsidiaries as one entity, as it provides more information to the shareholders
and creditors. This paper explores the need for and the development of CFS in India.
Corporate financial reporting in India is subject to the provisions of the Companies Act,
1956. The Corporate Law Committee that was responsible for formulating the Companies Act
had recommended that consolidation was not required and felt that the subsidiaries reports
gave more information than a consolidated one and thus, no additional information was
derived from consolidation (Rammaiya, 1988). Hence, no CFS was required in India for a
long time. Section 212 of the Companies Act required that along with the balance sheet of the
holding company, subsidiarys balance sheet, profit and loss account, the report of the Board
of Directors (BOD) and the auditors report of the holding company are also to be attached.
Additionally, a statement of the holding companys interest in the subsidiary company, net
2008 The Icfai University Press. All Rights Reserved.
An Analysis of Consolidated
and Parent-Only Financial Statements of
Indian Companies
Padmini Srinivasan* and M S Narasimhan**
Along with several new accounting regulations related to disclosure practices, Indian
companies were asked to provide Consolidated Financial Statements (CFS) since 2002.
Unlike other disclosure regulations, consolidation was a major deviation from the earlier
stand that consolidation would not provide additional information to the users of financial
statements. This study examines whether there are any major structural changes in the
operations of Indian companies, which warrant for a review of existing disclosure
regulations, or whether it is mainly to maintain consistency with the international
practices. The study concludes that the change of disclosure regulation favoring
consolidation is more proactive in nature and consistent with the international practices
than changes in the operations of Indian companies.
* Faculty Member, Finance and Control Area of Indian Institute of Management, Bangalore, India.
E-mail: [email protected]
** Faculty Member, Finance and Control Area of Indian Institute of Management, Bangalore, India.
E-mail: [email protected]
The Icfai University Journal of Accounting Research, Vol. VII, No. 3, 2008 28
aggregate amount that is not dealt within the companys accounts as it relates to the subsidiarys
profit after deducting the losses or vice versa, and the amount of profit or loss for the present
and the previous financial year if dealt with or provided in the companys accounts were also
required. In effect, the shareholders received the individual as well as the subsidiaries financial
statements.
While Indian regulators preferred individual subsidiary companies full financial report
over CFS, the regulators in other parts of the world preferred CFS much earlier. In UK for
example, based on the recommendations of the Cohen Committee report, the CFS was mandated
in the Companies Act 1948. The move towards CFS may have been prompted by certain
corporate failures.
1
Although mandated in 1948, companies in the UK had voluntarily started
publishing the CFS much earlier. In his seminal work, Bircher (1988) comments on the regulation
of CFS and concludes that, The actual widespread adoption of consolidated accounting in
Great Britain appears to have merged from a complex set of influences at the end of the war.
A driving force for such presentation was also the fact that there was complete divergence
between ownership and management in Britain by 1936 indicating the movement from an
owner to a managerial society. Bircher (1988) argues that such a disclosure will highlight the
inner reserves which now exist in the form of subsidiary profits not transferred, otherwise the
subsidiary losses not taken up would be disclosed.
A similar situation existed in few other countries like Japan and countries in the European
Union. For example in Japan, parent-only financial statements were prepared initially. Japanese
companies were run by family business groups and succeeded by family generations. The
financing requirement for these companies was more bank driven. Many companies had affiliates
which provided different utilities to the group. These affiliates also held shares (cross holdings)
in each others companies, in a way which helped prevent the takeover threats. The parent-
only financial statements were treated as primary financial statements. The CFS did not represent
the relationship between the group companies and hence, the parent-only statements were
prepared representing the unique culture of the Japanese business group. McKinnon (1984)
traces the CFS preparation by the Japanese companies to raise funds in the foreign capital
markets, specially in the United States. As companies approached capital markets, the exchanges
and regulators demanded CFS in line with requirements of those markets. Moreover, a few
reorganizations occurring on account of earnings management through subsidiary companies
made it mandatory for Japanese companies to prepare the CFS. After the year 1984, Japanese
firms were required to prepare CFS in addition to parent-only financial statements.
The CFS were treated as additional statements. It was perceived that the move towards CFS
was more to decrease the opportunity for accounting manipulation (Lowe, 1990). The move
towards harmonizing of the accounting standards led to the issue of consolidated accounting
in 1997 which became effective from the year 2000. This standard treats CFS as the primary
financial statements. Lowe (1990) in his paper also argues that preparation of CFS without
reconciling with the culture would lead to reports that are less useful to the stakeholders and
thus proposes certain additional statements.
1
Certain corporate scandals especially the Royal Mail and the Dunlop Ltd cases related to accounting may have
influenced to provide CFS in UK. Bircher (1988) discusses the events that lead to the legislation of CFS. See also
Walker (1978, p. 78 ) and Nobes and Parker (1985, p. 218).
29
The consolidated financial reporting in Australia was several years behind that of the United
Kingdom or United States. The Uniform Companies Act of 1961 required companies in Australia
to disclose certain aspects of holding company. Companies covered by this Act were required
to disclose separately, investments in subsidiaries, the amounts due to and from subsidiaries,
and to provide a statement of how the profits of the subsidiaries were distributed. Whittered
(1986) concludes that in an unregulated market, the move towards consolidated financial
statements were implemented through regulation.
In the European Union, several countries did not prepare the CFS until the Seventh Company
Law Directive was included in their own countrys legislation. Now that European Union
follows the International Accounting Standards, they would also prepare the CFS. In the United
States, CFS was mandated in 1959 through Accounting Research Bulletin 51. The Financial
Accounting Standards Board (FASB) further pronounced several standards (statements) on CFS
since then. In 1995, FASB incorporated the definition of control in its proposed statement for
the purpose of consolidation. In 1999, exposure draft clarified the proposed definition of
control of an entity. The definition of control involved decision-making ability that is not
shared with others. This differs from the earlier view where the focus was on decision-making
powers relating to another entitys individual assets. Thus, in a way the move was closer to the
entity concept of consolidation, moving away from the traditional parent company approach.
The proponents of consolidation argue that CFS provides more relevant information than
individual statements as they reflect the total amount of resources held by the group. They also
argue that CFS takes into account the interrelation and the dependencies of companies with
that of the parent and also provides a fair presentation of its financial position when one
company is having controlling interests in other companies.
2
The opposition to CFS stems
mainly from the argument that managements desire to smooth holding companys reported
profits as a means of fostering financial stability (Whittered, 1986). In certain cases, consolidation
actually defeats the purpose of the company promoting subsidiary companies. For example,
a pharmaceutical company in order to separate the regular drug production with drug discovery
business might form a separate subsidiary company for drug discovery. Investments for this
high-risk company might come from the parent company as well as from a few venture capitalists.
This new company would take several years to report profit and all the investors of this new
company understand the business risk. Consolidating the loss reported by the new venture
during the initial years with the parent company, actually defeats the whole purpose of starting
the new company as a separate entity. If the new company is a listed company, it is quite
possible that the new company stocks are selling at a much higher rate compared to the parent
company, even though the new company is posting loss during the initial period.
Another problem that investors face in analyzing CFS is the underlying assumption that all
the assets and liabilities of the consolidated company are controlled by and available to the
parent company, and hence, to its shareholders. This assumption will not accurately reflect
the parents ownership position. CFS combines companies with different operating activities,
capital structures and their different economic characteristics which may make the financial
statements unclear. This is especially problematic with the consolidation of the cash-generating
processes of different divisions. Serious problems in one division can be masked by the strong
cash-generating activities in another. When non-homogeneous subsidiaries are consolidated,
2
Consolidated Financial Statements, Accounting Research Bulletin No. 51 Para 1.
the CFS may result in a different situation. Depending upon the financial characteristics of the
subsidiary, consolidation may result in financial statements that look better or worse than the
actual results (White et al., 2001).
Preparation of CFS Accounting Standards (AS 21) came into effect from the accounting
period commencing from April 1, 2001. Consolidation as per AS 21 needs to be done when
the parent company directly or indirectly holds more than one half of the voting power of an
enterprise or through control of the composition of the BOD in its subsidiaries. The reason
behind India moving from the earlier stand of providing the financial statement of subsidiary
companies to CFS is not clear. There are two possible reasons for this move. One, there is a
significant change in the business environment where subsidiary companies have become an
important component of the organizational structure over the years, thus requiring a change in
disclosure practice. Alternatively, the primary drive for the CFS was mainly to reduce the
difference between the International accounting standards and the Indian accounting standards.
This paper examines the need for deviating from the earlier practice of providing individual
companies report to consolidation. The significance of subsidiary companies operations in
terms of investments, revenue and profitability is studied to understand the need for
consolidation. The rest of the paper is organized as follows. The next section deals with the
review of the accounting aspects of the CFS, which is followed by sample; parent and the
subsidiary analysis using certain parameters; and the conclusion.
Review of the Accounting Aspects of the Consolidated Financial Statements
Consolidations of financial statements presentation are derived from two theoriesthe parent
company theory and the entity theory. Each view is different and they reflect how the
non-controlling interests, the value of assets, liabilities and goodwill are reflected in the financial
statements. In the parent company view, CFS is considered as an extension of the parent
company accounts. As per this view, parent companys interest in the subsidiary is simply
financial in nature and is widely practiced worldwide (Beckman, 1995). The parent company
is considered more important and significant than the subsidiary company. The parent company
consolidates the book value of all of the subsidiarys assets and liabilities and then allocates a
portion of the subsidiarys net book value to the non-controlling shareholders. The parent
portion of the fair market value increment of the assets and goodwill are recognized. The share
of goodwill and fair market value increment of the non-controlling shareholders is not allocated
and not presented in the CFS.
The entity theory suggests that corporate groups are dominant economic constituents and
the consolidated statements are more important for providing information about the group and
the parent company in particular. The entity view recognizes the economic entity as a whole.
The view recognizes that the parent, although not owning 100% of the assets has an effective
control of the entire subsidiary. The concept of control is defined as the capacity to dominate
a decision directly or indirectly, relating to the operating and financial policies of the other
company. In the entity view, the parent includes the full value of the subsidiary in its CFS and
then allocates the non-controlling interest (as a percentage) to minority interest. The minoritys
share of goodwill is also recognized. There is also a proprietary view which consolidates only
the parents portion of assets and goodwill in the CFS. The CFS does not include the portion of
minority interest in the financial statements.
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Indian Accounting Standard (AS-21) follows the entity theory with a modification.
The subsidiaries assets and liabilities are taken at the historical cost. The assets and liabilities
are added line by line. The excess of cost to the parent over the parents portion of net-worth
is treated as goodwill. The negative goodwill is taken to the capital reserve. There is no
specific requirement for the treatment of goodwill or negative goodwill. The consolidation
process in the International Financial Reporting Standards (IFRS) is similar to the Indian accounting
standards. However, the assets and liabilities are to be measured at the fair value for the
purpose of arriving at the goodwill. The excess amount paid over the fair value of the assets
taken over will be treated as goodwill. Minority interest also gets presented in the balance
sheet. The US GAAP requires the parent view of consolidation and does not allocate goodwill
that belong to the minority interest.
Prior literature examines various aspects of CFS, primarily, examining the value relevance
of CFS over parent-only financial information. There were hardly any studies examining whether
firms have increasingly been investing in other companies and creating a complex holding
structure, which in turn warrants CFS and then discuss whether CFS adds any value over
alternative financial reporting formats. A review of studies that examined the value relevance
of CFS is provided here. The earliest of studies that examined the parent-only and the CFS
statements is by Francis (1986). This study examined the CFS using UK data and the loss of
information due to consolidation with respect to debt reporting. Several studies in Japan have
examined the relevance of the CFS in the Japanese context as Japan prepares both the CFS and
parent company accounts like in India. A study by Harris et al. (1991) examined the effects of
consolidation in Japan and found no evidence of incremental information content or value
relevance of consolidated data. However, the study concluded that the results could not be
generalized because of inter-firm ownership relations and unique institutional ownership.
More recently, Herrmann et al. (2001) provided evidence to show that while the Japanese
stock market adjusts for the persistence of parent-only earnings in the current stock prices,
it appears to underestimate the subsidiary earnings and concluded that the valuation of subsidiary
earnings is different from that of parent-only earnings. Okuda (2006) examines the relevance
of the CFS in the Japanese context. The study found that, in general, subsidiary Return On
Equity (ROE) news has a greater effect in driving current stock returns than parent-only ROE
news. Their finding thus supported the CFS regulation in Japan. In addition, the study found
that as the subsidiary companies performance is more important as an indicator of consolidated
performance, the market pays greater attention to subsidiary ROE news. Ishikawa (2000) shows
that consolidated earnings are more important than parent-only earnings, in cases where the
ratio of consolidated to non-consolidated figures is high. A study by Niskanen et al. (1998)
shows that consolidated earnings have a significant incremental explanatory power for stock
returns and not the parent-only earnings for Finland companies, suggesting that the CFS improves
the information content.
There is no notable research in the US as the data of the stand alone parent company is not
available. A set of studies deal with the use of affiliates to manage earnings. For example,
subsidiary companies can be used as tools in transfer pricing mechanism or other means where
there is expropriation, i.e., the controlling shareholder benefits from self-dealing transactions
in which profits are transferred to other companies they control. A parent company may use its
dominant relationship over an affiliated company to structure transactions between the two
companies in a way that allows profits to be shifted from the affiliate to the dominant company
or vice versa. Since the value of the dominant company is directly linked to the profitability
and well-being of the entire economic entity, this type of earnings management, may misled
the users of the dominant companys financial statements. However, such transactions between
the parent company and subsidiary can affect the individual earnings, but consolidated earnings
remain unaffected.
The value relevance of CFS is mixed in different countries. There were hardly any studies in
the Indian context on the value relevance of CFS. Before taking up the value relevance issue,
it is important to examine whether there is any major change in the financial statement numbers
of Indian companies, where companies started using subsidiary companies in their operations.
Sample Data
For the purpose of this study companies in the BSE 500 were taken. Data for the years
2003- 2007 were taken from CMIE Database, Prowess and from Capitaline Database. Out of
these, companies with no subsidiary companies (124 companies) and companies that did not
exist (185 companies) for the time period were eliminated. This resulted in 191 sample
companies. For analysis, sales, profit and assets are taken between parent-only and CFS.
Analysis
The average market capitalization of the sample companies was Rs. 10,298 cr as on March
2007. They include both financial and non-financial companies. The sample companies are
from different industries like banking, information technology, pharmaceutical, engineering,
construction automotive, etc. The average promoter holdings in these companies are about
46.35%. There are 26 companies with foreign promoters holding more than 25% shareholding
with an average holding of 45.12%. There are 16 companies with majority shareholding by
government and the balance with Indian promoters and others. The results of the analysis are
discussed below.
Investment in Companies
The need for an additional statement consolidating subsidiaries arises only when a company
invests in the equity of another company. There are several reasons for such an investment by
a company in another company. If the purpose of investment is purely short-term, then the
market value of such investment is reported as additional information. The market value
information helps the investors and others to evaluate the performance of such investments.
The problem arises when such investments are made in subsidiary companies, particularly
those of unlisted subsidiary companies. In other words, as long as investments are made in
listed companies, whether such investments are for short-term purpose or long-term purpose,
the market value of the investment is reasonable and adequate to evaluate the performance of
such investments. If such investments are in unlisted companies, there are two options for
investing companiesto provide the financial statements of such companies where investments
are made or to provide CFS. Table 1 shows the extent of investments in other companies by the
BSE-500 index companies during the last 10 years.
Investments as a percentage of total assets range between 22% to 31.3%. A significant part
of the investment is unquoted, whose market value is not easily ascertainable. Investments in
33
subsidiary companies are in the range of 7% -12% of the total investment. Investments in
groups range between 1% to 3% of the total assets with an average of 2.26% over the last
Table 1: Investment Component of Total Assets of the Sample Companies
(Rs. in crores)
Year Total Assets Investments Investment Marketable
in Group Investments
in Groups
1998 8,13,694.43 18,0021.31 13,763.22 2,910.68
22.12% 7.65% 21.15%
1999 9,39,102.68 2,10,246.78 16,740.15 3,089.13
22.39% 7.96% 18.45%
2000 10,62,154.80 2,58,969.70 23,065.05 5,418.72
24.38% 8.91% 23.49%
2001 12,07,106.20 3,17,104.66 32,522.40 8,880.84
26.27% 10.26% 27.31%
2002 14,23,092.80 4,04,226.54 36,721.51 7,467.1
28.40% 9.08% 20.33%
2003 15,57,687.00 4,65,398.33 44,954.87 11,315.72
29.88% 9.66% 25.17%
2004 16,77,577.00 5,29,454.17 55,315.61 11,056.59
31.56% 10.45% 19.99%
2005 20,37,869.80 5,97,209.95 60,659.34 11,438.65
29.31% 10.16% 18.86%
2006 24,25,395.60 5,97,739.13 59,377.92 10,244.31
24.65% 9.93% 17.25%
2007 29,85,390.20 6,87,216.94 86,787.22 20,318.18
23.02% 12.63% 23.41%
Notes: 1. Figures below investments are investments as a percent of total assets.
2. Figures below investments in group is the percent of investment in groups to total
investments.
3. Figures below marketable investment in groups is the percentage of marketable
investment in group to total investments in the group.
10 years. Although the percentage is small, the absolute amount has gone up from Rs. 9,523
cr to Rs. 58,577 cr, i.e., 515% growth. The average marketable investments in the group is
around 22.19%. This indicates that the size of investments in the subsidiary companies is very
marginal. The market value of quoted investment shows significant volatility. In other words,
had these unquoted investments been made in listed companies, the performance of such
investments would have shown similar volatility. Also, had these unlisted companies actually
listed themselves there would have been a fair chance to believe that the performance of such
companies would have reflected similar volatility. Hence, the practice of companies investing
in unlisted companies makes a case for disclosure about the performance of such investments.
However, there is no significant change in the pattern of investments as a whole, and particularly
on unquoted investments over the last 12 years. Hence, there is no clear case for changing the
practice of providing subsidiary companies financial statements with the reports of auditor
and director and prescribing consolidation.
Number of Subsidiary Companies
In addition to investment values, the number of subsidiary companies would also provide
some justification for a particular method of disclosure. Consolidation would be meaningful
if a company has several subsidiary companies. For instance, a typical multinational company
operates through several subsidiary companies located at different nations but most of them
are in the same line of business. Subsidiary company form of organizational structure is generally
preferred for legal, tax and management control perspectives. In such cases, consolidation
would provide an insight on the overall performance of the company. On the other hand, if
the number of companies were either few or such subsidiary companies are performing different
lines of businesses, consolidation is of limited use. For a company operating in cement,
constructions, machinery, software, chemicals, etc., through subsidiary companies,
consolidation is of limited use in assessing the performance of the companies. Annexure 1
gives some examples of companies and their subsidiaries having different businesses. For
example, Larsen and Toubro, a company in the construction and engineering field also has
subsidiary company in information technology and in the finance sector. Table 2 shows the
frequency distribution on number of subsidiary companies.
Table 2 shows that one-fourth of the sample have no subsidiary companies and another 20%
have just one subsidiary company. Investments in subsidiary companies where the number of
subsidiary companies are large are also
relatively small. For example, there are 41
companies which have more than 10
subsidiary companies. However, the sales
of the subsidiary companies as a
percentage of the total consolidated sales
is about 13.1% and the subsidiary profit
as a percentage of the consolidated profit
is about 8.5%. Annexure 2 lists company
names and the number of subsidiaries they
have for the last category.
Turnover of Subsidiary Companies
The significance of subsidiary company in
terms of turnover is examined. Tables 3
and 4 provide the details of sales of
subsidiary company over the last five years.
Table 3 shows the parent-only and consolidated sales. The contribution of subsidiary company
in total consolidated sales is about 10% during the last five years. The figures are slightly
Table 2: Frequency Distribution of
Subsidiary Companies
No. of Sub. Frequency Percentage
0 124 25
1 99 20
2 59 12
3 51 10
4 32 7
5 32 6
6 19 4
7 17 3
8 14 3
9 5 1
10 7 1
Above 10 41 8
Total 500 100
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higher at median level but consistent over the years except in 2007. Standard deviation of sales
between parent-only and consolidated firms has come down over the years. Table 4 shows the
frequency distribution of subsidiary companies sales during the last five years. The percentage
in the frequency is as follows: S = (CS PS)/ CS where the S

is the subsidiary sales; CS is
the consolidated sales and PS is the parent-only sales.
The distribution shows that sales of subsidiary companies are relatively low for a large
number of sample companies. However, the number of companies, whose subsidiary contributes
Table 3: Sales of Parent-Only and Consolidated Sales
Sales Parent-Only Consolidated Variation % Variation
2007
Mean 6,204.15 6,951.22 747.08 11
Median 1,296.19 1,760.62 464.43 26
Standard Deviation 20,617.84 20,704.53 86.68
2006
Mean 4,823.73 5,380.03 556.30 10
Median 1,037.25 1,247.44 210.19 17
2005
Mean 4,054.57 4,497.30 442.73 10
Median 910.22 1,094.86 184.64 17
2004
Mean 3,295.11 3712.76 417.65 11
Median 729.48 902.74 173.26 19
2003
Mean 2,987.90 3,265.57 277.67 9
Median 649.36 752.22 102.86 14
Table 4: Frequency Distribution of Sales of Subsidiary Companies
Subsidiary Company Sales Range 2007 2006 2005 2004 2003
Less than 0 9 7 7 8 8
0 to 9.99% 95 100 100 106 109
10% to 19.99% 19 28 28 27 31
20% to 29.99% 19 18 18 14 14
Above 30% 49 38 38 36 29
Total 191 191 191 191 191
more than 30% of the sales have increased over the years. In other words, though there is no
clear evidence for Indian companies using subsidiary route, the importance of subsidiary
companies have increased for a few companies. One possible reason is increasing overseas
acquisition or geographical expansion of Indian companies.
Profit of Subsidiary Companies
If companies start using subsidiaries to manage earnings, then sales may not reflect such
motives. The next analysis is to study the profits of parent-only and consolidated profits.
Table 5 provides the details of profit. The contribution of subsidiary companies on consolidated
profit is 12% in 2007 and has increased marginally over the last three years. The contribution
of subsidiary profits was merely 3% in the year 2003. There is no abnormal change in the
contribution of subsidiary companies on the profit.
Table 5: Profit of Parent-Only and Consolidated Sales
Net Profit Parent-Only Consolidated Variation % Variation
2007
Mean 627.32 712.88 85.55 12
Median 131.53 140.84 9.31 7
2006
Mean 451.73 502.83 51.10 10
Median 83.43 91.50 8.07 9
2005
Mean 411.65 456.35 44.71 10
Median 62.09 70.14 8.05 11
2004
Mean 313.74 349.54 35.80 10
Median 50.63 58.37 7.74 13
2003
Mean 262.59 271.33 8.74 3
Median 38.08 36.37 1.71 5
Standard Deviation 980.86 1,019.22 38.36
Table 6 shows the frequency distribution of profit at different profit ranges. Similar to
sales, in about 50% of the sample companies, the contribution of subsidiary companies on
consolidated profit is less than 10%. However, there is a decreasing trend in the number of
companies whose subsidiary profit is more than 30%.
In the above case, the absolute profits are showing a similar trend as sales. Investors need
to estimate the favorable cash flows in the form of dividends or interest, etc., to understand
how the margins affect the relative prices of its securities. In this context, investors motivation
37
Table 6: Frequency Distribution of Profit of Subsidiary Companies
Range 2007 2006 2005 2004 2003
Less than 0 58.00 54.00 60.00 63.00 83.00
0 to 9.99% 75.00 73.00 66.00 75.00 54.00
10% to 19.99% 21.00 23.00 23.00 14.00 19.00
20% to 29.99% 14.00 12.00 13.00 9.00 8.00
Above 30% 23.00 29.00 29.00 30.00 27.00
Total 191 191 191 191 191
for investment is focused on the financial return they will receive from their investment.
For this purpose, understanding the ratio may be useful and comparing them with the CFS
ratios will give more insights on performance.
The following observations are made towards the ratios. The average return on net assets
in 2007 for the sample parent only numbers is 14.82% while that of the consolidated is
slightly less at 14.2%. An earlier study of German companies by Pellens and Linnhoff
(1993) found that there was considerable difference between the two statements.
Debts were higher and profitability was lower in the consolidated financial statements.
Lambert and Zimmer (1996) study using different sample for the German companies indicated
similar results. Using Spanish company data similar results were obtained (Abad et al.,
1998). In the present sample we find similar results. The average profit margin ratio is about
17% as compared to the average consolidated profit margin ratio of 13.8% for the same
year. For nearly 69% of the companies, the consolidated margin ratio was less than that of
the parent only margin ratio. Even though the size of the subsidiary company compared to
the parent company is not very high, there is some evidence of subsidiary companies not
doing well and companies using subsidiary companies for managing the earnings. Therefore,
there is a need to examine whether the market is able to incorporate such differences in the
price, which apparently is the objective of regulators in insisting consolidation.
Assets of Parent and Subsidiary Companies
The assets distribution in the subsidiary companies is also similar to that of sales and profits
ranges. In more than 60% of the companies, the asset of subsidiary companies comprises of
less than 10% of the total consolidated assets. However, the number of companies in this
group has been reducing and companies in other ranges have gone up. Only 13% of the
sample companies have subsidiary companies contributing to more than 30 % of the consolidated
assets (Table 7).
Table 7: Frequency Distribution of Assets of Subsidiary Companies
Range 2007 2006 2005 2004 2003
Less than 0 29 36 39 43 46
0 to 9.99% 90 90 98 99 95
10% to 19.99% 30 27 21 18 22
20% to 29.99% 18 16 15 17 13
Above 30% 24 22 18 14 15
Total 191 191 191 191 191
Conclusion
Accounting development in countries is a function of several factors. Historical influence,
regulatory environment and culture are some of the factors that influence the accounting
system of a country. There is no clear evidence that business practices of Indian companies
have changed over the years and that Indian companies have started using subsidiary companies
to a great extent. Investments in other companies, investment in unquoted securities, number
of subsidiary companies and contribution of subsidiary companies on sales and profit of
consolidated sales and profits, show reasonable amount of stability over the years. However,
the return and the profitability ratios are lower in the CFS. Consistent with globalization and
the Indian companies expanding their geographical operations, the analysis shows that there is
an increase in the number of companies whose subsidiary sales and profit, as a ratio of
consolidated sales and profit, is at a higher end. Given this minor deviation at this point of
time, one can conclude that the change in disclosure regulations is proactive.
CFS were introduced in 2002 to improve the reporting requirements and for harmonization
with the international accounting standards. Integration of accounting standards and disclosure
practices is a more reasonable argument for the change in regulations. At the same time, the
regulation could consider the nature of subsidiaries and their significance in prescribing the
requirement of consolidation. For example, CFS is of limited use for any analytical purpose
when a company is highly diversified. The diversified business may generate revenue which
may be valued differently. Similarly, if there is a concealment of financial distress or underlying
solvency problem in a subsidiary company, the same will not be reflected. It is presumed
that the subsidiaries statements will generally follow the accounting policies of the parent
company on consolidation. Though segment reporting provides some high level details it
may not be sufficient to draw conclusions regarding the performance of the subsidiary
companies. On the other hand, consolidation will be desirable when a company uses subsidiary
for geographical reasons and all subsidiary companies are by and large performing same kind
of operations.
With this in view, regulators should consider the provision of individual companies financial
statements for more meaningful analysis. This must be made available at least in the websites
of the companies as against writing to the company for the same. At least a statement giving
the amount of income, expenses and the net result of each of the subsidiary company along
with a single page balance sheet would be suitable. Along with this, a list of shareholding
pattern of all the major shareholders of each of the subsidiary company must be given.
A single regulation is easy to administer but not necessarily a right choice. If easy
administration is the criteria, we can reasonably conclude that India has not reached the stage
for any major deviation in the disclosure practices of subsidiary companies operations. However,
this conclusion requires further examination on value-relevance of the CFS.
I
39
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41
Company Some Subsidiary Companies
Aditya Birla Nuvo Ltd.
Birla Global Finance Co. Ltd.
Birla Insurance Advisory Services Ltd.
Birla Sun Life Insurance Co. Ltd.
Birla Technologies Ltd.
Wipro Chandrika Ltd.
Wipro Ltd.
Wipro Consumer Care Ltd.
Wipro Healthcare I T Ltd.
Wipro Holdings (Mauritius) Ltd.
Wipro Infrastructure Engg. Ltd.
Wipro Travel Services Ltd.
D C M Shriram Consolidated Ltd. Anant Thermal Energy Ltd.
Bioseed Genetics Vietnam
Bioseed Research India Pvt. Ltd.
D C M Shriram Credit & Investments Ltd.
D C M Shriram Infrastructure Ltd.
D S C L Energy Services Co. Ltd.
Godrej Industries Ltd. Ensemble Holdings & Finance Ltd.
Girikandra Holiday Homes & Resorts Ltd.
Godrej Beverages & Foods Ltd.
Godrej Hicare Ltd.
E I D-Parry (India) Ltd. Coromandel Bathware Ltd.
Coromandel Fertilizers Ltd.
Parry America Inc.
Parry Chemicals Ltd.
Parry Infrastructure Co. Pvt. Ltd.
Parrys Investments Ltd.
Escorts Ltd.
C A-Escosoft Ltd.
Cellnext Solutions Ltd.
Escorts Asset Management Ltd.
Escorts Construction Equipment Ltd.
Escorts Securities Ltd.
Escosoft Technologies Ltd.
Idea Telecommunications Ltd.
I T C Ltd.
Larsen & Toubro Ltd.
B F I L Finance Ltd.
Bay Islands Hotels Ltd.
I T C Infotech India Ltd.
Wimco Ltd.
Reliance Industries Ltd.
Andhra Pradesh Expositions Pvt. Ltd.
Bhilai Power Supply Co. Ltd.
G D A Technologies Inc.
L & T Finance Ltd.
L & T Infotech Ltd.
Ranger Farms Pvt. Ltd.
Reliance Dairy Foods Ltd.
Reliance Haryana S E Z Ltd.
Reliance Retail Ltd.
Reliance Retail Insurance Broking Ltd.
Retail Concepts & Services (India) Pvt. Ltd.
Annexure 1
Annexure 2
1 Akruti Nirman Ltd. 12
2 Bank of Baroda 11
3 Bharti Airtel Ltd. 13
4 Cambridge Solutions Ltd. 19
5 D L F Ltd. 54
6 Dalmia Cement (Bharat) Ltd. 23
7 Dr. Reddys Laboratories Ltd. 16
8 Essel Propack Ltd. 20
9 Gitanjali Gems Ltd. 12
10 Glenmark Pharmaceuticals Ltd. 13
11 Gokaldas Exports Ltd. 13
12 H C L Technologies Ltd. 29
13 Hindalco Industries Ltd. 18
14 Housing Development Finance Corpn. Ltd. 13
15 I C I C I Bank Ltd. 13
16 I T C Ltd. 11
17 I V R C L Infrastructures & Projects Ltd. 12
18 Kotak Mahindra Bank Ltd. 13
19 Larsen & Toubro Ltd. 14
20 Mahindra & Mahindra Ltd. 23
21 Pantaloon Retail (India) Ltd. 11
22 Polaris Software Lab Ltd. 11
23 Punj Lloyd Ltd. 13
24 Ranbaxy Laboratories Ltd. 16
25 Raymond Ltd. 11
26 Reliance Capital Ltd. 12
27 Reliance Industries Ltd. 13
28 State Bank of India 16
29 Sun Pharmaceutical Inds. Ltd. 11
30 Suzlon Energy Ltd. 19
31 Tata Consultancy Services Ltd. 18
32 Tata Motors Ltd. 13
33 Tata Steel Ltd. 12
34 Teledata Informatics Ltd. 12
35 Unitech Ltd. 54
36 United Breweries (Holdings) Ltd. 11
37 United Spirits Ltd. 16
38 Videocon Industries Ltd. 11
39 Videsh Sanchar Nigam Ltd. 13
40 Wipro Ltd. 11
41 Zee Entertainment Enterprises Ltd. 11
Company Names
Number of Subsidiaries
Sl. No.
Reference # 09J-2008-07-02-01

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An Analysis of Consolidated and Parent-Only Financial Statements of Indian Companies

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