15

(Topic)________________________________

A PROJECT SUBMITTED

AS A PART OF INTERNAL EVALUATION OF

COURSE: ADVANCED FINANCIAL ACCOUNTING

PROGRAMME: M. COM, UNIVERSITY OF MUMBAI

FIRST SEMESTER 2013-14

SUBMITTED BY

(Name)________________________________

ROLL NO. __________

UNDER THE GUIDANCE OF

MR. ASHOK GUJAR

GURU NANAK COLLEGE OF ARTS, SCIENCE AND COMMERCE

G. T. B. NAGAR, MUMBAI - 400 037

15

Declaration

I hereby declare that the work embodied in this project entitled

“_____________________________________________” forms my own

original contribution which has been carried out under the guidance of

Mr.______________________ at Guru Nanak College of Arts, Science and

Commerce, G.T.B. Nagar, Mumbai – 400037. This work has not been submitted

for any other degree of this or any other University. Whenever reference has

been made to the work of others, it has been clearly indicated and included in the

Bibliography.

Signature of Student

(____________________Name)

Certified by

15

Signature of Internal Guide Signature of External Examiner

College seal Signature of Principal

Acknowledgement

This project comes out to be a great source of learning and experience. A lot of

effort has been put by various people to make this project a success. This has

greatly enhanced our knowledge about Dell Inc. I greatly acknowledge our

indebtness to Mr. Rahul Mishra,for helping me throughout this project and for

providing me in-depth knowledge. This project is a culmination of efforts of my

friends whose sincere inputs and focused attitude could bring this project to

fruition. Finally, thanks to almighty God who has been a source of strength and

confidence.

15

CONSOLIDATED

FINANCIAL

STATEMENTS

15

Project by Praveen Kumar

M.com (Part-I), Roll No.19,

S.I.E.S. College

Submitted to

Prof: DHANABALU R. NAIKAR

INDEX

Sr.No. Sub-Topics Page No.

1 Introduction 6-7

2 Meaning 7-7

3 Definition as per AS-21 7-8

4 Explanation of Terms 8-13

5 Objectives 14-16

6 Advantages 16-18

7 Cost of Control 18-21

15

8 Minority Interest 21-27

9 Consolidated Profit & Loss 28-32

10 Consolidated Balance Sheet 33-36

11Solved Problem on Consolidated Balance Sheet

36-39

12 BIBLOGRAPHY 40-40

CONSOLIDATED FINANCIAL STATEMENTS

INTRODUTION:

Business combinations are often results in a parent-subsidiary relationship between

the acquirer and the acquiree. The acquiree continues to operate as a legal entity

separate from the acquirer, while the latter controls the former. A parent and its

subsidiary together form a group. Shareholders of the parent are more interested in

understanding the performance of the group rather than in understanding the

performance of the parent alone.

15

Consolidated financial statements present financial information about a parent and

its subsidiaries as a single economic entity. They are presented primarily for the

benefit of the shareholders, creditors, and other resource providers of the parent.

When the number of related companies is large, there is no other way of

summarizing the vast amount of information relating to the individual companies.

Consolidated financial statements often provide the best means of presenting

information regarding the activities and resources of the overall economic entity.

It is now a well established practice across the globe that a parent should present

consolidated statements, which combine the statements of the parent and all

majority-owned subsidiaries excluding those on which it is unable to exercise

control. Although majority ownership is the most common means of acquiring

control. An enterprise may be able to exercise control over another by other means,

such as through the control of the composition of the governing body (the directors

in case of a company). IAS-27 and AS-21 requires the consolidation of the entities

controlled by the reporting enterprise, including those in which the reporting

enterprise has less than majority ownership. SFAS-94 does not require the

consolidation of subsidiaries with less than majority ownership. However it

requires an entity to include financial statements ‘variable interest entities’ (VIE)

in the consolidated financial statements.

15

Meaning of Consolidated Financial Statements:

The objective of this Standard is to lay down principles and procedures for

preparation and presentation of consolidated financial statements. Consolidated

financial statements are presented by a parent (also known as holding enterprise) to

provide financial information about the economic activities of its group. These

statements are intended to present financial information about a parent and its

subsidiary or subsidiaries as a single economic entity to show the economic

resources controlled by the group, the obligations of the group and results the

group achieves with its resources.

Consolidation is mandatory only for listed companies as per the listing agreement.

Consolidation’s done as per general rules of preparation of financial statements of

individual companies. Significant accounting policies and notes which necessary

are presenting a true and fair view of consolidated financial statements should also

be disclosed.

DEFINITION AS PER AS-21:

“Consolidated financial statements are the financial statements of a group

presented as those of a single company”

AS 21 come into effect in respect of accounting periods commencing on or after 1st

April i.ie for year ends 31st

March, 2002.The A.S 21 is applicable to all the

15

enterprises that prepare the consolidated financial statement. It is mandatory for

Listed Companies and Banking Companies

As per AS 21, the consolidated Financial Statements would include:

I. Profit and Loss A/c

II. Balance Sheet

III. Cash Flow Statement

IV. Notes of Accounts except typical notes.

V. Segment Reporting

Consolidated Financial Statements are prepared in addition to separate financial

statements of the parent and its subsidiaries. Consolidated statements should be

prepared for both domestic as well as foreign subsidiaries.

EXPLANATION OF TERMS:

SUBSIDIARY

The company whose shares are held is called as a subsidiary company. The

subsidiary companies can either be partly owned or wholly owned subsidiaries.

Wholly owned and partly owned subsidiary companies.

If a holding company acquires all the shares (100%) having voting rights of a

company, such company is called wholly-owned subsidiary company. In other

15

case, if the holding company owns the majority of shares having voting rights (i.e.,

more than 50% of voting right shares)of a company , such a company os known as

partly owned subsidiary company. In such partly owned subsidiary companies the

remaining shares which the holding company could not acquire, are called the

minority shareholders or outsiders. And the interest of the minority shareholders in

the assets of the subsidiary company is called the minority interest.

Meaning under companies act 1956

Section 4 of the companies Act, 1956 defines a subsidiary company. A company is

a subsidiary of another if and only if

1. That other company controls the composition of its Board of directors; or

2. That other;

3. Where the first mentioned company is an existing company in respect of

which the holders of Preference shares issued before the commencement of

this Act have the same voting rights in all respect as the holders of Equity

shares exercises or controls more than half of the total voting power of such

company.

4. Where the first mentioned company is any other company, holds more than

half in nominal value of its Equity share capitals. OR

15

5. The company is a subsidiary of any company which is that other company’s

subsidiary

Analyze the profit of Subsidiary Company:

Analysis of profit of subsidiary company as pre-acquisition profit and post-

acquisition profit is done on the basis of date of acquisition of shares by the

Holding company. Profits earned by the subsidiary company up to the date of

acquisition of shares by Holding company are called as pre-acquisition profits or

capital profits. The profits earned by the subsidiary company after the acquisition

of shares by the Holding company are called as Post-Acquisition profits or

Revenue profits. The loss of the subsidiary up to the date of acquisition is treated

as a capital loss and subsequent to the acquisition as a revenue loss. Thus, the

cutoff date is the date of acquisition of shares of the Holding Company.

If Investments are made during the financial year, the profits should be apportioned

on a reasonable basis i.e. on the basis of time. The assumption being that profits

have accrued evenly during the year.

Particulars Capital Profit Revenue Profit

General Reserve xx xx

Other Reserve xx xx

Profit & loss xx xx

Total xx xx

15

Holding Company xx xx

Minority xx xx

  xx xx

HOLDING COMPANY

One of the popular firms of business combination is by means of holding company

or Parent Company. A holding company is one which directly or indirectly

acquires either all or more than half the number of Equity shares in one or more

companies so as to secure a controlling interest in such companies, which are then

known as subsidiary companies. Holding companies are able to nominate the

majority of the directors of subsidiary company and therefore control such

companies. Holding company meet directly from such subsidiary company or it

may acquired majority OR shares in existing company. Such company also

considered as subsidiary company in which holding company acquired majority

shares

1. By acquiring more than 50% of voting right shares of some other companies.

15

2. By controlling the composition of the board of directors of some other

companies

3. By controlling any other company which is the holding company some other

company.

ADVANTAGES OF HOLDING COMPANIES:

Holding company need not to be invest entire amount in the share capital in

subsidiary company still enjoy controlling power in such company

It would be possible to carry forward losses for income tax purposes

Each subsidiary company prepares its own accounts and therefore financial

position and profitability of each undertaking is known.

Holding company may additional acquired or disposed of and the shares in

subsidiary company market whenever if desired.

PRESENTATIONS OF ACCOUNTS BY HOLDING COMPANIES

As laid down in section (212) of the companies act, 1956. a holding company

requires to attach its balance sheet. The following documents and present the

same to its shareholders.

15

1. A copy of the Balance Sheet of the subsidiary.

2. A copy of the Profit and Loss Account of the subsidiary.

3. A copy of the Report of the Board of Directors of the subsidiary

4. A copy of the Auditors Report of subsidiary.

5. A statement indicating the extent of holding company’s interest in the

subsidiary at the end of the accounting year of the subsidiary

6. Where the financial year of the subsidiary company does not coincident with

the financial year of the holding company. A statement showing the

following.

I. Whether there are any changes in holding companies interest in subsidiary

company since the close of financial year of the subsidiary company.

II. Details of material changes which have occurred between the end of the

financial year or the subsidiary company an end of the financial year of the

holding company

PREFERENCE SHARES HELD BY THE HOLDING COMPANY:

15

When preference shares are issued by a subsidiary company and are held by the

holding company it should be treated in the same way as equity shares.

If the holding company acquires the preference shares at par, the cost of

investment of the holding company cancels out of shares shown on the Balance

sheet of subsidiary company.

If the preference shares are acquires at premium or at a discount the balance is

carried to goodwill or capital reserve in the Consolidated Balance Sheet. The

preference shares owned by the Minority shareholders are added to Minority

interest.

PARENT COMPANY:

A parent company is a company that owns enough voting stock in another firm to

control management and operations by influencing or electing its board of

directors; the second company being deemed as a subsidiary of the parent

company. The definition of a parent company differs by jurisdiction, with the

definition normally being defined by way of laws dealing with companies in that

jurisdiction.

15

1. Cost acquisition to the parent company in each subsidiary and the parent

portion of net equity if each subsidiary on the date on which investments in

each subsidiary made, should be eliminated from consolidated balance sheet.

2. In case of chain subsidiaries the parent company should consolidate its

subsidiaries as well as subsidiary of the subsidiaries

3. A parent company makes two or more investments in its subsidiary at

different dates the consolidated financial statements are presented only from

the e date on which holding-subsidiary relationship comes into existence.

OBJECTIVES OF CONSOLIDATED FINANCIAL STATEMENTS:

A company consolidates its financial statements with affiliates' results to portray a

true, complete picture of its financial situation at a given point in time. Accounting

consolidation calls for three methods, depending on the equity stake. These are

outright consolidation, equity method and cost method -- if the business owns more

than 50 percent, between 20 and 50 percent, and less than 20 percent equity,

respectively.

1. Correctness in Equity Reporting:

15

Consolidating a parent company's financial statements opens a portal onto the

organization's equity stakes in not one but several subsidiaries. By combining its

results with the performance data of domestic and international affiliates, the

parent business gives investors a complete measure of its equity holdings.

Financiers may see this type of reporting as an opportunity for further investments

in corporate operations because they can determine tactics and tools the business

uses for competitive expansion. Unlike outright consolidation, the equity and cost

methods may not produce accurate equity reporting because regulatory guidelines

do not require that investing businesses combine their performance data with the

operating results of investees. Also known as affiliates or subsidiaries, investees

are businesses into which a parent company pours money. In the equity method, a

parent business reduces its stake when an investee posts a net loss or pays out

dividends, increasing it when the affiliate records net income. The cost method

generally calls for financial updates only when the parent organization sells its

equity stake.

2. Financial Data Accuracy:

Combined financial statements tell readers whether a parent company is truly

generating sales on its own or whether something other than marketing prowess is

at work. By comparing the corporation's standalone reports with its consolidated

financial statements, savvy investors can appraise the company's sales generation

power and the extent to which it relies on affiliates to post rosy reports. For

investors, these considerations are important to accurately gauge business risks and

determine -- for example -- how political trouble or social unrest in one country

can affect a company's bottom line. Financial statement consolidation covers four

15

accounting data summaries: a balance sheet, a statement of profit and loss, a

statement of cash flows and a statement of retained earnings.

3. Asset Allocation and Investment Decision-Making:

Combined accounting information often enables financiers to make better

investment decisions. In essence, the practice has effectively overturned the

conventional wisdom on corporate profitability and its impact on long-term

productivity. For example, financial commentators may review a parent company's

results with an eye toward how much money the business made from overseas.

Gone are the days when companies solely relied on a single product or service to

make money. In modern economies, businesses routinely engage in several

ventures, produce varied items and provide an expansive assortment of services.

Financial data consolidation also touches on productivity issues -- telling investors

areas or countries that are more productive in a company's operations and how this

increased productivity translates into higher revenues and cash flows.

4. Regulatory Compliance:

15

Consolidated financial statements help regulatory agencies, such as the U.S.

Securities and Exchange Commission; determine the scope of a company's

activities and find where the buck stops with respect to legal responsibility. But the

most important element in accounting consolidation, in this realm, is that it helps

regulators accurately calculate corporate equity and enforce antitrust laws.

THE ADVANTAGES OF CONSOLIDATING FINANCIAL STATEMENTS:

Financial statements, including the balance sheet, the income statement and the

cash flow statement, are primary financial tools for every business. They provide

vital information in easy-to-understand ways and enable analysts to quickly form

financial ratios to compare different numbers. However, for some businesses,

financial statements are not easy to create. Large corporations tend to be

segmented with several different divisions that all have different financial

operations. Consolidated financial statements combine all these divisions into a

single report.

1. Broad Picture:

The basic advantage when consolidating financial statements is the broad picture it

gives. Investors do not want to go through several different financial statements to

15

add up information and find out how the corporation is doing overall. The

consolidated statements provided by the parent company accomplish the task

automatically and make an excellent reference point for shareholders, leaders and

anyone interested in how all the different parts of the business are functioning as a

whole.

2. Balance

Consolidating financial statements also lets a corporation effectively balance its

appearance to outside parties. For example, during one period a parent company

may lose revenue and perform poorly, but the subsidiaries may perform very well

and increase revenues. The consolidated statement will balance the poor parent's

performance with the positive subsidiary performance, allowing the company to

show that through its diversification it remained profitable.

3. Exclusions

According to consolidated financial statement guidelines, a corporation can also

exclude certain divisions from the statements. This is also an advantage; because it

allows investors to see -- and companies to show -- that some financial aspects are

not long term. For example, subsidiaries are exempt if the parent company's

15

ownership of them is temporary or if the control of the company does not actually

rest with the majority owner, which can happen through bankruptcy.

4. Necessity

Consolidated financial statements are required by most governments as an accurate

representation of a parent company's financial activity. In general, tax laws require

that a single accounting entity be represented out of the net resources and operating

results of all the divisions that a company owns. As a result, many companies have

become used to producing consolidated statements for governments, investors and

internal analysis

COST OF CONTROL OR GOODWILL

The holding company acquires more than 50% of the shares of the subsidiary

company. Such shares may be acquired at a market price. Which may be at a

premium or at discount? This amount is reflected in the balance sheet of holding

company of the assets side as investment in the shares of subsidiary company. This

is the price paid for shares in net assets of subsidiary company as on date of its

acquisition. Net assets of the subsidiary company consist of share capital,

accumulated profits and reserve after adjustment, accumulated losses as on the date

of acquisition. If the amount paid by the holding company for the shares of

subsidiary company is more than its proportionate share in the net asset of the

15

subsidiary company as on the date of acquisition, the difference is considered as

goodwill.

If there is excess of proportionate share in net assets of subsidiary company

intrinsic of shares acquired and cost of shares acquired by holding company there

will be capital reserve in favour of holding company.

It goodwill already exists in the balance sheet of holding company or both the

goodwill thus calculated, will be added up to the existing goodwill. Capital

Reserve will be deducted from Goodwill.

In short, net amount resulting from goodwill and capital Reserve will be shown in

the consolidated Balance sheet.

A. Determine Cost Of Investment  

  Cost of investment is calculated as follows  

  Amount Invested xx

  (Cost as per Holding Companies Balance sheet)  

  Less: Dividend received from subsidiary out of pre-acquisition profit xx

  Cost of preference shares in subsidiary company xx

  Adjusted cost of Investment xxx

     

B. Determine value of Investment  

15

  Holding Companies share of capital xx

  Add: Holding Company’s share of capital profit xx

  Value of Investment xx

Calculate Cost of Control

Cost of Control=A-B

Goodwill=A>B (A-B)

Capital Reserve=A<B (B-A)

When the value of Investment is less than the cost of investment in shares of

subsidiary company, the difference is considered as goodwill. Capital Reserve is

the excess value of investment over the cost of investment.

Cost of Control / Goodwill

Solved on Example on Cost of control or Goodwill

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

Share capital 40,000 Equity shares of Rs. 10/- each 4,00,000

Reserves and surplus 2,50,000

Secured loan 2,50,000

15

Other Liabilities 1,00,000

10,00,000

On the above date H Ltd. acquired 30,000 Equity shares in S Ltd. on the above date for Rs. 7,50,000 fixed

assets of S Ltd. Were appreciated by Rs. 1,50,000 find out cost of control / Goodwill.

Cost of investment in S Ltd.   7,50,000

Less : 1) Share in share capital (4,00,000 x ¾) 3,00,000  

2) Share in Reserves and surpluses    

Capital profit (2,50,000 x 3/4) 1,87,500  

Share in capital profit    

(Appreciation in fixed assets) 1,50,000 x 3/4 1,12,500 (6,00,000)

COST OF CONTROL/GOODWILL   1,50,000

Suppose in above case, cost of investment amounted to Rs. 5, 00,000 then instead

of goodwill, there would be capital Reserve Rs. 1,00,000.

MINORITY INTEREST:

15

The claim of outside shareholders in the subsidiary company has to be assessed and

shown as liability in the consolidated balance sheet. Minority interest in the net

assets of the company is nothing but the proportionate share of aggregation of share

capital, reserve surpluses funds etc. proportionate share of all assets should be

deducted from the minority interest.

Thus, minority interest is the share of outsider in the following.

1. Share in share capital in subsidiary.

2. Share in reserves (Both pre and post acquisition of subsidiary).

3. Share in accumulated losses should be deducted.

4. Proportionate share of profit or loss on revaluation of assets.

5. Preference share capital of subsidiary company held by outsiders and

dividend due on such share capital, if there are profits.

Minority interest means outsiders interest. It is treated as liability and shown in

consolidated. Balance sheet as current liability. This amount is basically intrinsic

value of shares held by minority.

Minority Interest-consists of

15

i)The amount of equity/attributable to minorities at a date on which investment in a

subsidiary is made.

ii) The Minorities share of movements is in equity since the date the parent

Subsidiary relationship coming to existence.

Minority Interest:

Share in equity on the date of acquisition xxShare in movement in equity since the date of acquisition xx XX

When minority interest is negative it should be adjusted against majority interest.

Negative Minority Interest should not be shown in the Consolidated Balance

Sheet.

Equity of the Subsidiary on the Date of acquisition of shares

It refers to net worth of the subsidiary, it includes share capital reserves surplus

less fictitious assets. Fictitious assets include:

15

i) Preliminary Expenses

ii) Discount on issue of shares

Iii) Profit/Loss Account Debit balance.

IV) Amalgamation adjustment A/c

Share capital, reserves and surplus of the subsidiary on the date of acquisition of

shares is shared by the parent and the minority shareholder in the ratio of equity

holding. It is popularly known as pre-acquisition reserves and surplus

Solved Example on Minority Interest:

The following is the Balance sheet of S Ltd. as on 31st

March, 2010.

Liabilities   Assets  

Share capital Fixed Assets 2,90,000

Equity shares of Rs. 10

each 2,70,000 Investments 2,75,000

General Reserve Profit &

Loss A/c 3,60,000 Current Assets 1,30,000

15

Current liabilities 85,000 Preliminary Expenses 20,000

       

  7,15,000   7,15,000

H Ltd. acquired 25,000 shares in S Ltd. on 31st March, 2010 at a cost of Rs.

2,75,000. Fixed assets were revalued at Rs. 3, 28,000. Find minority interest.

.

Solution:

Minority Interest= 2,000/27,000 =2/27’

Minority Interest

1 Share in share capital 20,0002,70,000 x 2/27  

2 Share in Reserves and Surpluses 20,000

3,60,000 x 2/27  

3 Share in capital profits 28,000(3,60,000-20,000+38,000) x 2/27  Minority Interest 68,000

Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share capital     Fixed Assets 3,00,000 1,00,000

Equity shares of Rs. 10

each 5,00,000 2,00,000

60% Shares in S.ltd at

cost 1,62,400 -

General Reserve 1,00,000 50,000 Current Assets 2,77,600 2,39,000

Profit & Loss A/c 60,000 35,000    

15

Creditors 80,000 60,000 Preliminary Expenses - 60,000

  7,40,000 3,45,000   7,40,000 3,45,000

H Ltd. acquired the share on 1st April 2009 on which date General Reserve and

profit and loss Account of S Ltd. Showed balances of Rs. 40,000 and Rs. 8,000

respectively. No part of preliminary expenses was written off during the year

ending 31st

March, 2010. Prepare the consolidated balance sheet of H Ltd. And its

subsidiary S Ltd. as on 31st March 2010.

Solution:

1. Capital profits of the subsidiary (i.e. profits earned prior to acquisition of shares)

General Reserve 40,000

Profit & Loss A/c 8,000

48,000

Less: Preliminary Expenses 6,000

42,000

15

2. Revenue profits of the subsidiary (i.e. profits earned after the acquisition of

shares)

To General Reserve 10,000 By balance b/fd 8,000

(Rs.50,000-40,000)   By Profit for the year 37,000

To Balance c/d 35,000  

  45,000   45,000

3. Calculation of cost of control or Goodwill

Amount paid for 60% shares of S Ltd   1,62,400

Less:    

paid up value of 60% shares of S Ltd 1,20,000  

60% of capital profits i.e. profits    

Prior to acquisition Rs.42,000 x 60/100 25,200 (1,45,200)

GOODWILL   17,200

4. Calculation of minority Interest

Paid up value of 40% shares of S Ltd 80,000

Add: 40% capital profits = 42,000 x 40/100 16,800

15

Add: 40% Revenue Profits = 37,000 x 40/100 11,800

  1,11,600

6. Alternatively, minority interest may be calculated as follows

Paid up value of 40% shares of S Ltd 80,000

Add : 40% of General Reserve as on 31.3.2010 20,000

50,000 x 40/100  

Add : 40% of profits and Loss Account 14,000

as on 31.03.2010 Rs. 35,000 x40/100  

  1,14,000

Less : 40% of preliminary expenses Rs. 6,000 x 40/100 2,400

   

  1,11,600

Consolidated Balance sheet of H Ltd. and its subsidiary S Ltd. as at 31.3.2010

Liabilities   Amt (Rs.) Assets  Amt (Rs.)

Share capital     Goodwill   17,200

Equity shares of Rs. 10 each   5,00,000 Other Fixed Assets    

15

Minority interest   1,11,600 H Ltd. 3,00,000  

General Reserve   1,00,000 S Ltd. 1,00,000 4,00,000

Profit and loss A/c H.Ltd 60,000   Current Assets    

Revenue Profits of S.Ltd 22,200 82,200 H Ltd. 2,77,600  

Creditors     S Ltd. 2,39,000 5,16,600

H Ltd. 80,000      

S Ltd. 60,000 1,40,000    

TOTAL   9,33,800 TOTAL   9,33,800

CONSOLIDATED PROFIT AND LOSS ACCOUNT:

The consolidated profit and loss account of the holding company and its

subsidiaries are prepared to show the operating company and its subsidiaries are

prepared to show the operating the consolidated profit and loss account of the

15

holding company and its subsidiary, the items appearing in the profit and loss

account of the holding company and the subsidiary companies have to be

aggregated.

But while doing so, the following adjustments have to be made.

1. Prepare profit and loss account in columnar form Amounts relating to

intercompany transactions are entered in the adjustment column against the

respective items and are subtracted while entering amounts in the total

columns.

2. All inter company operating transactions are eliminated such as purchase

and sale of goods, interest on loans among the group companies.

3. All inter company profits are adjusted

4. Dividends received from the subsidiary company by the holding company

should be eliminated from both the sides of consolidated profit and loss

account.

5. Interest accrued and outstanding on Debenture of the subsidiary company

held by the holding company should be accounted by holding and subsidiary

company both and then it’s should be eliminated.

15

6. Readjustment of Depreciation on Revaluation on fixed Assets at the time of

acquisition of shares by the holding company should be adjusted in

consolidated balance sheet and respective fixed assets and in the

consolidated profit and loss account.

7. The minority interest in the profit of subsidiary company should be

transferred minority interest account, in the proportion of total profit after

adjustment of revaluation of fixed Assets, but before adjusting unrealized

profit on stock.

8. The share of holding company in pre-acquisition profit should be transferred

to cost of control, in case shares are acquired during the year.

9. Share of holding company in the past acquisition profits shall be considered

as revenue profits.

10.The balance in holding company columns will represents the total profit or

loss made or suffered by the group as a whole.

Part II- Form of Statement of Profit and Loss

Name of the company __________

Profit and Loss statement for the year ended _________

15

 

Particulars

Note No.

Figures for the current

reporting period

Figures for the

previous reporting

period I. Revenue from operation   xxx xxx II. Other Income   xxx xxxIII. Total Revenue (i+ii)   xxx xxx  Expense: Cost of materials consumed   xxx xxx  Purchases of stock-in-trade xxx xxxIV. Changes in inventories of finished

goods work-in-progress and stock-in-progress

xxx xxx

     Employee benefits expense   xxx xxx

Finance cost xxx xxxDepreciation and amortization expense xxx xxxOther expense xxx xxx

  Total expense   xxx xxx V. Profit before exceptional and

extraordinary items and tax(iii-iv)  xxx xxx

xxx xxx

VI. Exceptional items   xxx xxxVII. Profit before extraordinary items and

tax(v-vi)  xxx xxx

VIII. Extraordinary items   xxx xxx IX. Profit before tax(vii-viii)   xxx xxxX. Tax Expense:   xxx xxx

i)current tax xxx xxxii)deferred tax xxx xxx

15

XI. Profit(loss) for the period from continuing operations(vii-viii)

     xxxx xxxx

XII. Profit/(Loss) from discontinuing operations

  xxx xxx

XIII. Tax expenses of discontinuous operations

  xxx xxx

XIV. Profit/(loss) from discontinuing operations(after tax)(xii-xiii)

  xxx xxxxxx xxx

XV. Profit(Loss) for the period (xi+xiv)   xxxx xxxx

  Earning per equity share      XVI. i)Basic   xxx xxx ii)Diluted   xxx xxx

SOLVED EXAMPLE ON CONSOLIDATED

XYZ Limited owns 80 per cent of the voting power of AB Limited, its only

investment, acquired on April 1, 2001 for Rs. 1,00,00,000. The net assets of

AB Ltd. on April 1, 2001 were Rs. 1,00,00,000. On October 1, 2002, the

investment in AB Limited was sold for an amount of Rs. 2,00,00,000. The

net assets of AB Limited on March 31, 2002 and September 30, 2002 were

Rs. 1, 50, 00,000 and Rs. 1,80,00,000, respectively, the difference

15

representing the profit for the period. The summarized consolidated financial

position of XYZ Limited and its subsidiary on March. 31, 2002 and on

September 30, 2002 was as follows:

Solution:

Particulars 31/03/2002 30/09/2002

SOURCES OF FUNDS    

Share Capital    

Equity Capital (@ Rs.10 each) 10,00,00,000 10,00,00,000

Reserves and Surplus    

Profit and Loss Account 2,50,00,000 3,00,00,000

Minority Interest 30,00,000 36,00,000

TOTAL 12,80,00,000 13,36,00,000

     

APPLICATION OF FUNDS      xx

Fixed Assets    

Goodwill 20,00,000 20,00,000

Other Fixed Assets, Net 8,50,00,000 8,00,00,000

Current Assets, Loans and Advances 5,60,00,000 6,86,00,000

Less : Current Liabilities and Provisions (1,50,00,000) (1,70,00,000)

Net Current Assets 4,10,00,000 5,16,00,000

     

TOTAL 12,80,00,000 13,36,00,000

15

The gain or loss on the disposal of the investment in AB Limited would be

computed as follows:

Net assets of AB Ltd. on the date of disposal, i.e., September 30, 2002 1,80,00,000

Less: Minority Interest (36,00.000)

Parent's share in the net assets of the subsidiary 1.44.00.000

Proceeds from disposal of subsidiary 2,00,00,000

Less: Parent's share in the net assets of the subsidiary (1,44,00,000)

Less: Goodwill (20.00.000)

Gain on disposal 36.00,000

[Based on Background Materials for Seminars on AS-21 published by ICAI]

CONSOLIDATION OF BALANCE SHEET:

A holding company is required to present to its shareholders consolidated balance

sheet of holding company and its subsidiaries. Consolidated balance sheet is

nothing but addicting of up or combining the balance sheet of holding and its

subsidiary together. However assets and liabilities are straight forward, i.e. added

15

line to line and combination of share capital, reserves, and accumulated losses are

not directly added in consolidated balance sheet.

Preparation of consolidated balance sheet. The following points need special

attention while preparing consolidated balance sheet.

1. Share of holding company and share of minority (outside shareholders).

2. Date of Balance sheet of holding company and that of various subsidiary

companies must be same. If they are not so necessary adjustment must be

made before consolidation.

3. Date of Acquisition of control in subsidiary companies.

4. Intercompany owing.

5. Revaluation of fixed assets as on date of acquisition, depreciation,

adjustment on revaluation amount etc.

6. The shareholding pattern of the subsidiary company as on the date on which

the consolidated balance sheet is prepared.

Particulars

  Figures as at the end of current reporting period

Figures as at the end of the previous reporting period

1. Shareholders’ Funds   xx xx

15

a)Share capital   xx xx b)Reserves and surplus   xx xx c)Money received against share warrants

xx2. Share application money pending   xx xxallotment   xx xx3. Non-current Liabilities       a)Long-term borrowings   xx xx b)Deferred tax liabilities(Net)   xx xx c)Other long term liabilities   xx xx d)Long-term provisions   xx xx4.Current Liabilities       a)Short-term borrowings   xx xx b)Trade payables   xx xx c)Other current liabilities   xx xx d)Short-term provisions   xx xx

TOTAL   xxxx xxxxI) Assets      1.     Non-current Assets   xx xxa)     Fixed assets   xx xxi)Tangible assets   xx xxii)Intangible assets   xx xxiii)Capital work-in-progress   xx xxiv)Intangible assets under development   xx xxb)    Non-current investments   xx xx

c)     Deferred tax assets(net)  xx xx

d)    Long term loans and advances   xx xx

15

e)     Other non-current assets   xx xx       2.     Current Assets   xx xxa)     Current Investments   xx xxb)    Inventories   xx xxc)     Trade Receivables   xx xxd)    Cash and cash equivalents   xx xxe)     Short-term loans and advances   xx xxf)      Other current assets   xx xx

TOTAL   xxxx xxxx

No.of Shares Proportion (%)

Holding company xx xx

Minority xx xx

For example H.Ltd acquires 8,000 equity shares in S.Ltd. Out of its issued capital

of 10,000 shares, the pattern of holding will be as follows:

No.of Shares Proportion (%)

Holding company 8,000 80%

Minority 2,000 20%

10,000 100%

This proportion should be used for finding out share of pre-acquisition and post

post acquisition profit, minority interest, and cost of control

15

Solved Problem on Consolidated Balance Sheet:

H Ltd. acquired 8,000 shares of Rs. 10 each in K Ltd. on 31st

March 2011. The

summarized Balance Sheets of the two companies as on that date were as follows:

Particulars H Ltd. Rs. K Ltd. Rs. Liabilities :         Share Capital :    30,000 Shares of Rs. 10 each 300000  10,000 Shares of Rs. 10 each   100,000Capital Reserve   52,000General Reserve 25000 5,000     Profit & Loss Account 38200 18,000Loan from I Ltd. 2100  Bills payable (including Rs.   1,7001,000 to H Ltd.)    Creditors 17900 5,000

   Total 383200 181,700Assets :    Fixed Assets 150000 144,700Investments in K Ltd. at cost 170000       Stock-in-hand 40000 20,000Loan to H Ltd.   2,000Bills Receivable (including Rs. 1200  700 from K Ltd.)    Debtors 20000 10,000Bank 2000 5,000     Total 383200 181,700

You are given the following information:

15

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

2. Interest receivable (Rs. 100) in respect of the loan due by H Ltd. to K Ltd. has not been credited in the account of K Ltd.

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

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

Solution:

Consolidated Balance Sheet of K Ltd. and its Subsidiary K Ltd. As

At 31st

March, 2011

LIABILITIES Rs. Rs. ASSETS Rs. Rs.

Share Capital Fixed Assets

Equity Share Capital Goodwill (on consolidation) 33,920

30,000 Equity shares of

Rs. 10 each, fully paid

3,00,000 Other Fixed Assets 1,50,000

1,39,700

2,89,700

Reserves & Surplus Current Assets, Loans &

Advances

General Reserves 25,000 Stock 40,000

20,000

60,000

P & L A/c H Ltd. 38,200 63,200 Debtors 20,000

Minority Interest 34,020 10,000 30,000

Current Liabilities &

Provisions

Bills Receivable 1,200

Creditors Less : Mutual Dues (200) 1,000

15

H Ltd. 17,900

KLtd. 5,000 22,900

Bills Payable 1,700 Cash & Bank 2,000

5,000

7,000

Less : Mutual Dues

Total

(200) 1,500Total

4,21,620 4,21,620

Working Notes:

1) Holding Proportion H Ltd. =12,000/15,000 = 4/5

Minority Interest=3,000/15,000 = 1/5

2).

Analysis of profits   Capital Profit Revenue Profit     P/L as on date of Acquisition 18,000     -Add: Interest due on Bal. 100 18,100   -     Reserve on date of Acquisition    Capital 52,000     -General 5,000 57,000   -  75,100   -Less:    Bonus Issue 50,000    Loss Revaluation of Assets 5,000 -55,000   -

15

  20,100   -Holding co. 4/5 16,080   Minority Interest 1/3   4,020  

3). Cost of Control

Cost of Investment   1,70,000

Less:    

Eq.Share Capital 1,20,000  

Capital Profit 16,080 -136080

    33,920

4). Minority Interest

Share Capital 30,000Share in Capital Profit 4,020

34,020

Treatment of loan & interest Receivable:

On taking credit for interest receivable of Rs. 100 by K Ltd. In respect of loan due by K Ltd., the profit and loss account balance of K Ltd. will increase to Rs. 18,000 and loan to H Ltd. will also increase to Rs. 2,100. On consolidation, inter-corporate loan of Rs 2,100 is set off and hence has not been shown in the consolidated balance sheet.

15

BIBLOGRAPHY