Semester VI

Subject FRFSA

Consolidated Financial Statements of Holding Company

& its Subsidiary Company(ies)
Dr. A D N Roy [7980222067, [email protected]]

Holding Company [H. Ltd.] is the parent company of its subsidiary company [S. Ltd]. One Holding Company may be
the parent of more than one Subsidiary Company.

H. Ltd. and S. Ltd., both maintain their separate legal entities. Each company prepares and publishes its own
financial statements as per the requirements of Companies Act, 2013. But the Group of H. Ltd. And S. Ltd. is
formed for some advantages :

1. Decentralizing the financial risk of any of the companies

2. To comply with legal requirements (e.g., a Bank has to set up a Subsidiary to do leasing business, or has to create
a separate Trust / Asset Management company, to do the business of mutual funds.]

3. Diversification of busibess at least cost.

If there is a group of H. Ltd. and S. Ltd. , H. Ltd. prepares the Consolidated P/L A/c and Consolidated Balance Sheet
of the Group as those of a single enterprise. The consolidated statements will disclose:

1. The economic activities of the group;

2. The economic resources controlled by the group;
3. The obligations of the group; &
4. The results achieved using the group-resources.

In order to become Holding Company (i.e. the Parent Company) it has to exercise control over its Subsidiary
Company in any one of the following ways:

1. Ownership of more than 50% of Shares of S. Ltd. having voting rights.

2. Controlling the composition of the Board of Directors of S. Ltd.
3. Controlling anothef Holding Company that controls the Subsidiary Company. [If A. Ltd. is the subsidiary of
B. Ltd, and B. Ltd. is the subsudiary of C. Ltd. , then A. Ltd. is deemed to be the subsidiary of C. Ltd. also, or
C. Ltd. is the holding company of A. Ltd. also.]

Now, we shall try to understand the method of preparation of CBS with the help of small illustrations.

Problem 1

Point of consideration: Investment by H is replaced by Assets and Liabilities of S

Two simple Balance Sheets are given below. If these are consolidated, see the changes:

H. Ltd. S. Ltd H. Ltd. S.

Ltd.
Share 12000 5000 Sundry 15000 8000
Capital Assets
(Re. 1
each
share)
Sundry 8000 3000 Investment 5000 ---
Liabilities (5000
shares in S.
Ltd)
20000 8000 20000 8000

Consolidated Balance Sheet

Share 12000 Sundry Assets 23000
Capital of H. (15000+8000)
Ltd
Sundry 11000
Liabilities
(8000+3000)
23000 23000

Changes:
a. Equity share capital of S. Ltd is not shown
b. Investment of H. in S. is also not shown

The above changes indicate that the investment by H is replaced by Assets and Liabilities of S

Problem 2

Point of consideration : Minority Interest = Equity held by outsiders.

The Balance Sheets shown below show that H. Ltd. has not acquired all equity shares of S. Ltd. See the
effect of consolidation.

H. Ltd. S. Ltd H. Ltd. S.

Ltd.
Share 12000 5000 Sundry 16000 8000
Capital Assets
(Re. 1
each
share)
Sundry 8000 3000 Investment 4000 ---
Liabilities (4000
shares in S.
Ltd)
20000 8000 20000 8000

Consolidated Balance Sheet

 Share 12000 Sundry Assets 24000
Capital of H. (16000+8000)
Ltd
Minority 1000
Interest
Sundry 11000
Liabilities
(8000+3000)
24000 24000

Changes:

Minority Interest is shown in the liability side of CBS.

Minority Interest = Equiry held by outsiders.

Formula for determination of MI

a) Outsiders’ share in share capital, reserves and p/l a/c balances of S. Ltd. In this problem, it is
1/5th of equity share capital of S. Ltd. only = Rs. 5000 x 1/5 = Rs. 1000. Or,
b) Outsiders’ share in the net assets of S. Ltd. In this problem it is 1/5th of (Sundry Assets less
Sundry Liabilities) = 1/5 x (8000—3000) = 1000

Problem 3.

Point of consideration : Capital Reserve

[Consolidation of two Balance Sheets is not possible without first ascertaining Capital Reserve orGoodwill]

Balance Sheets as on 31/3/2020

H. S. Ltd. H. S. Ltd.
Ltd. Rs. Ltd. Rs
Rs. Rs.
Share 12000 6000 Sundry 20000 12000
Capital Assets
(Re. 1
each
share)
Reserve 3000 2000 Investment 7500 ----
(6000
shares in S)
P/L A/c 2000 1000
Sundry 10500 3000
Liabilities
27500 12000 27500 12000

H. Ltd. acquired shares on 31/3/2020.

We will first calculate Capital Reserve by any of the two methods:

Method 1
Equity acquired in S. Ltd.

Share 6000
Capital
Reserve 2000
P/L A/c 1000
Total 9000
equity
Less: Price 7500
paid for
Investment
Capital 1500
Reserve

Method 2

Net Assets acquired in S. Ltd.

Sundry 12000
Assets
Less: 3000
Sundry
Liabilities
9000
Less: Price 7500
paid for
Investment
Capital 1500
Reserve

Consolidated Balance Sheet as on 31/3/2020

Share Capital 12000 Sundry Assets 32000

[H Ltd.] (20000+12000)
Capital 1500
Reserve
Reserve [H. 3000
Ltd.]
P/L A/c [H. 2000
Ltd.]
Sundry 13500
Liabilities
(10500+3000)
32000 32000

Note: Capital Reserve arising from acquisition of shares in Subsidiary means the excess of share in equity (or net
assets) over and above the price paid for investment.

Problem 4.

Point of consideration :
 i) Goodwill or Cost of Control & ii) Minority Interest

Balance Sheets as on 31/12/2019

H Rs S Rs H Rs S Rs
Eq. 12000 5000 Fixed 10000 6000
Shares Assets
(Rs 10
each
fully paid
up)
Pref. 4000 1000 Current 11500 2000
Shares Assets
(Rs 10
each
fully paid
up)
P/L A/c 2500 1000 Cash at 7000 1000
Bank
Creditors 10000 2000
28500 9000 28500 9000

H. Ltd. acquired 90% of Equity Shares of S. Ltd. on 1st January 2020 at Rs 15 per share. Prepare CBS as on
1/1/2020.

Step 1: Calculation of Goodwill

Investment Rs
A/c (500 6750
equity
shares x
90% x
Rs15)

Less: Rs
Paid up value 4500
of 450 equity
shares
90% of Pre- 900 5400
Acquisition
Profit (Rs1000)
Goodwill 1350
(or Cost of
Control)

Step 2: Ascertaining Minority Interest

Paid up Rs 500
value of
50 Equity
Shares
 Paid up 1000
value of
Preference
Shares
Share of 100
Pre-
acquisition
profit
(10% of Rs
1000)
MI 1600

Consolidated Balance Sheet as on 01/01/2020

Eq. Share 12000 Goodwill 1350

Capital [H
Ltd.]
Pref. Share 4000 Fixed Assets 16000
Capital [H (10000+6000)
Ltd. ]
P/L A/c [H. 2500 Current 13500
Ltd.] Assets
(11500+2000)
Minority 1600 Cash at Bank 1250
Interest (250+1000)
Creditors 12000
(10000+2000)
32100 32100

Note: Goodwill arising from acquisition of shares in Subsidiary means the excess of price paid for investment
over and above the share in equity (or net assets).

Problem 5.

Point of consideration:

Pre-acquisition and Post-acquisition Profit of S. Ltd.

Balance Sheets as on 31/3/2020

H. S. H. S.
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs
Share 12000 5000 Sundry 20000 8000
Capital Assets
(Re. 1
each
share)
Reserve 5000 1000 Investment 6500 ----
(5000
shares in S)
P/L A/c 2000 1000
 Sundry 7500 1000
Liabilities
26500 8000 26500 8000

Shares were acquired by H. Ltd. On 30/9/2019.

S. Ltd. Transferred Rs. 500 from profit to reserve on 31/3/2020.

Prepare CBS as on 31/3/2020.

Special point to note: Here CBS is to be prepared 6 months after acquisition.

It is needed in this case to first divide all profits of S. Ltd. in to Pre-acquisition profit and Post-acquisition profit.

After ascertaining both “pre and post acquisition profit of S. Ltd.”, these two are shared between H. Ltd. and
Minority shareholders.

1. The portion of pre-acquisition profit of H. Ltd. Is used as usual in the calculation of Capital Reserve, or it
reduces Goodwill.
2. The portion of post-acquisition profit of H. Ltd. Is added with its P/L A/c credit balanc.
3. The portions of pre-acquisition profit and post-acquisition profit of outsider shareholders are added with
Minority Interest.

Step 1: Profit made by S during the current year (ending on 31/3/2020) and its division

P/L A/c Rs. 1000

balance on
31/3/2020
Add: 500
Transfer to
Reserve
Total Profit 1500
of the year
Profit for 750
pre- [Capital
acquisition Profit]
period
(1/4/2019
to
30/9/2019)
Profit for 750
post- [Revenue
acquisition Profit or
period Current
Profit]

Step 2: Division of Reserve of S. Ltd.

Balance of Rs.
Reserve on 1000
31/3/2020
Less: 500
Amount
 transferred
from
current
year’s
profit
Opening 500
balance of [Capital
Reserve on Profit]
1/4/2019

Step 3: Goodwill / Capital Reserve

Investment Rs
A/c (5000 6500
equity
shares)

Less: Rs
Paid up value 5000
of 5000 equity
shares
Reserve 500
(Opening
Balance)
Profit made 750 6250
prior to holding
Goodwill 250
(or Cost of
Control)

Consolidated Balabce Sheet as on 31/3/2020

Share 12000 Goodwill 250

Capital [H.
Ltd]
Reserve [H. 5000 Sundry Assets 28000
Ltd.] (20000+8000)
P/L A/c [H. 2750
Ltd. 2000 +
S. Ltd 750]
Sundry 8500
Liabilities
(7500+1000)
28250 28250

Note: Pre-acquisition Loss of S. Ltd. Is also to be shared between H. Ltd. and Minority, if any. H. Ltd.’s share will
increase Goodwill. Outsiders’ share will reduce MI.

Exercise 1. Point of consideration: Pre-acquisition Loss to be added with Goodwill

Balance Sheets as on 31/12/2019

 H. S. Ltd. H. S. Ltd.
Ltd. Rs. Ltd. Rs
Rs. Rs.
Share 10000 5000 Sundry 16000 10000
Capital Assets
(Re. 1
each
share)
General 5000 Investment 6000 ----
Reserve (5000
shares in S)
P/L A/c 4000 1800
Creditors 3000 3200
22000 10000 22000 10000

Shares were acquired by H. Ltd. on 30/6/2019. On 1/1/2019 Balabce Sheet of S. Ltd. showed a loss of Rs. 3000,
which was written off out of profits earned during 2019. Profits are assumed to accrue evenly throughout the year.
Prepare CBS as on 31/12/2019.

Ans. Profit of 2019 = 4800

[½ earned upto date of holding (2400) & ½ earned after date of holding (2400)**]

Pre-acquisition Loss = 600

Goodwill = 1600

P/L A/c in CBS:

H. Ltd. 4000

S. Ltd. 2400**

Total of CBS 27600

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In my next post on Holding Company Accounts, I will present:

1. Problem on simple calculation of Minority Interest when there is only Pre-acquisition Profit.
2. Problem on Pre and Post-acquisition Profit, calculation of Goodwill and Minority Interest.
3. Discussion on elimination of Intra-group Transactions and resulting Unrealized Profits.
4. Treatment of Contingent Liabilities arising due to transactions between H. Ltd. and S. Ltd. and between
anyone of the group (H or S) and the outsiders.
5. Treatment of unrealized Profits made by H or S, when one of them has sold to the other goods, at a
profit, but the goods remain unsold and included in the stock of the purchaser company.
6. Treatment of Profit or Loss on Revaluation of Fixed Assets of S. Ltd.
7. Treatment of Bonus Shares
(Problems on calculation of Goodwill arising before or after issue of Bonus Shares out of
I] Pre-acquisition Profit or ii]Post- acquisition Profit).

8. Treatment of Dividend from S. Ltd.

i) Unclaimed Dividend
ii) Proposed Dividend

iii) Dividend paid out of pre-acquisition profit or post-acquisition profit or from both.

Thank You

Dr. A D N Roy

Umeschandra College

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