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HOLDING COMPANY

• As per section 4(4) of the companies act stipulates:”A

company shall be deemed to be the holding company of
another ,if but only if , that the other is its subsidiary.”
• A holding company is a limited company
• It acquires all or majority of equity shares of another limited
company – called the subsidiary company.
• It controls the composition of board of directors of another
company(subsidiary).
• The subsidiary company continues to enjoy the status of a
separate legal entity.

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 SUBSIDIARY COMPANY

• Section 4(1) of the companies act defines subsidiary company

.Accordingly , a company shall, subject to the provisions of sub-
section (3), be deemed to be a subsidiary of another if, but only if :
(a) That other controls the composition of its board of directors
(b)That other
(i) 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 respects
as the holders of equity shares,exercises more than half of the total
voting power of such company;
(c) The first – mentioned company is a subsidiary of any company
which is that other’s subsidiary.

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 TYPES OF SUBSIDIARY COMPANY

 Wholly owned subsidiary company: A company in which all the shares

with voting rights i.e ( 100%) are owned by the holding company, it is said
to be a wholly owned subsidiary company.
 Partly Owned Subsidiary Company : A company in which only the majority
of shares ( more than 50%) are owned by the holding company, it is said to
be a partly owned subsidiary.
• Minority shareholders : In partly owned subsidiary companies
,shareholders who do not sell their shares to the holding company are
termed “ minority shareholders “.
• Minority Interest : Minority shareholder’s interest or share in the assets of
the subsidiary company is termed as “minority interest”.

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 LEGAL REQUIREMENTS FOR A HOLDING
COMPANY
• Section 212 of the companies act stipulates that the balance sheet
of a holding company has to be accompanied by the below
mentioned documents of relating to each of its subsidiaries:
1. A copy of the balance sheet of the subsidiary
2. A copy of the P&L a/c of the subsidiary company
3. A copy of the report of its board of directors
4. A copy of the report of its auditors
5. A statement containing the following particulars :
(1) the nature and extent of holding companies interest in the
subsidiary at the end of the last financial year
(2) the net aggregate amount of profits or losses in the subsidiary so
far as it concerns the members of the holding company and is not
dealt within the holding company’s accounts.

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CONSOLIDATED FINANCIAL STATEMENTS

• “ Consolidated financial statements” means the preparation

and presentation of profit &loss account and balance sheet of
a holding company and its subsidiaries in a single format.
• As per the companies act , there is no legal provision insisting
a holding company to prepare and present “ group accounts”
or consolidated financial statements.
• The main purpose of it is to reflect a true and fair view of the
position and the profit or loss of the holding company
“group”.
• Further shareholders can get the first hand information on the
company authentically.

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 ADVANTAGES

 Facilitates easy comprehension: Shareholders are in position to get

a clear insight about the financial position of the group (parent and
all its subsidiaries) at a glance.
 Assists in ascertaining intrinsic value of shares: For various
accounting procedures , intrinsic value of shares serve as an
essential tool.
 Proper assesment of return on investment: Only consolidated
financial statements can provide proper information on the total
share of a holding company in the revenue profit of its subsidiaries.
 Minority interests disclosure: In the consolidated balance sheet ,
the item shown under the head “minority interest” discloses the
total amount payable to outside shareholders.
 Helps in the “ evaluation “ of holding company: Consolidated
financial statements ,by reflecting a true and fair view , the
investors may be able to evaluate the performance of the company.

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 LIMITATIONS

• Varied information: The activities of subsidiaries companies

differ from each other , information combined together in a
single format may result in confusion and alternatives.
• Irrelevant or concealment of facts: The data got from
subsidiary companies may not be relevant in the combined
form .

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 CONTENTS OF CONSOLIDATED
BALANCESHEET

• Schedule VI of the companies act stipulates that a holding

company will have to disclose the following items under the
respective headings as shown :

A. On the assets side :

1. Under the head “ Investments” : Investments in equity shares ,
preference shares, debentures or bonds of subsidiaries
companies.
2.Under the head “ loans &advances : loans &advances given to
subsidiaries.

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 CONT…..

B. Liabilities side:
1. Under the head “secured loans”: loans and advances from
subsidiaries against secured properties.
2. Under the head “unsecured loans”: other loans and advances
from subsidiaries.
3. Under the head “ Current liabilities& provisions”: Any amount
due from subsidiaries.

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 PREPARATION OF CONSOLIDATED
BALANCE SHEET
 Investment Account – Elimination or Cancellation:
• The assets shown in the balance sheet denote the resources owned
by the group(holding + subsidiaries).
• The liabilities shown are claims on the assets( resources)of the
group.
• These internal items – that are assets to one and liabilities to other
will not appear in consolidated balance sheet.
• This process is known as elimination.
• The principle of cancellation is based on following assumptions:
1. It should be wholly owned subsidiary company.
2. The holding & subsidiary company do not indulge in trade with each
other.
3. The shares are purchased at par.

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 MINORITY INTEREST

• The minority interest is to be computed and shown as a separate item in

liability side .
• Minority interest is the amount payable to outsiders with respect to share
capital and accumulated profit to extent of their shares.
• Computation:
Add:
1. Proportionate value of equity shares held : Amount
2. Proportionate value of pref. shares held :
3. Proportionate share in capital profits :
4. Proportionate share in revenue profits :
5. Proportionate shares of bonus shares :
6. Proportionate share in P/L account
Step A : Add 1 to 6 : --------------------
7. less: Proportionate share in P/L account (dr.) :

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 CONT….
8. Proportionate share in capital loss :
9. Proportionate share in revenue loss :
Step B: Add 6 to 9 : ------------------------
Step C : Minority interest (step A- step B)---------------------
 Cost of control or Goodwill:
• In general , the shares of a subsidiary company are purchased either
as a premium or at a discount by the holding company.
• When the share capital of the subsidiary company held by the
holding company is cancelled against investment in share difference
will arise.
1. When the holding company purchases the shares at a price above
the nominal value , the excess price paid represent goodwill or cost
of control.
Goodwill = Investment at cost – Face value of shares purchased

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 CONT…..
2. When the holding company purchases shares at a price below the face
value , the difference represents capital reserve.
This may be represented in the form of equation:
Capital reserve = Face or paid up value of shares purchased – Investment
at cost.
Method:
Step 1. Amount paid for shares purchased -----------
ADD:
Step 2. Holding company’s share of capital loss ---------------
LESS:
Step 3. (i) Face value of shares ----------
(ii) Holding company’s share of capital loss ---------
(iii) Holding company ‘s share of bonus shares issued -----------
by subsidiary.
(iv) Holding company’s share of dividend paid out of -----------
capital profit.
Step 4. Goodwill or Capital reserve ---------------
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 PRE-ACQUISITION PROFITS &RESERVES

• The subsidiary company , on the date of acquisition of shares by the

holding company , is having balances in p/l account &reserve
account.
• Such accumulated profits of the subsidiary company existing on the
date of acquisition are known as “pre- acquisition profits” or
“capital profits”.
1. Pre-acquisition profit/reserve
Treatment – Pre-acquisition profits are treated as capital profits.
They are to be included in capital reserves &added against goodwill.
2. Post-acquisition profit/reserve
Treatment- They are treated as revenue profit. They are added to
surplus of the company.
• While post – acquisition reserves are added to general reserves.

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 Important Notes:-
1. Capital reserve of the holding co. must be adjusted with goodwill
as both cannot be shown at a time in the balance sheet.
2. When computing the shares of minority interest distinction should
not be made between pre & post acquisition profits/reserves.
3. A distinction between pre & post acquisition profits/reserves has
to be made for accumulated profits/reserves of the subsidiary co.
for determining the shares of the holding co.

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 PRE- ACQUISITION LOSSES

• Pre – acquisition losses are like capital losses relating to share

of holding company.
• In consolidated balance sheet , it will increase the cost of
control or decrease the capital reserve.
• Post – acquisition losses are like revenue losses. It is debited
to accumulated balance in the p/l account of the holding
company.
• In case , there is no sufficient profits it is shown as separate
item on asset side of balance sheet.
• There is no distinction between pre &post acquisition losses
with respect to minority interest.

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 INTER-COMPANY TRANSACTION

• The company in a group i.e the holding company and subsidiary company,
may trade each other.
• They owe money to each other on account of common
transaction of buying and selling of goods, lending and borrowing of
money, rendering services to each other.

1. Debtors and creditors:

• Transactions with respect to sale and purchase of goods on credit take

place between the holding company and its subsidiaries.
• This will result in mutual indebtedness as debtors in the balance sheet of
the company which sells goods and as creditors in the balance sheet of the
company which purchases those goods on credit.

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 Treatment
• If the same amount appears in both the companies, they can be eliminated
by deducting common amounts both from the debtors and creditors (thus
by reducing on both sides of the consolidated balance sheet).
• If there is any difference between the two, it may be due to cash-in-transit
or goods-in-transit. Such "transit" amount is to be reduced from the side
on which higher amount is shown. Further, this item(cash or goods in
transit) is to be shown on the assets side of the balance sheet as a separate
item.

2. Loans Payable and Receivable

• Loans are advanced to subsidiaries by the holding company or vice versa. It
is shown as an asset in the balance sheet of the company which advances
the loan and as a liability in the balance sheet of the company which
receives that loan
• If interest on the loans is outstanding, the P&L A/c of the lender company
will be credited with the amount of interest due. Loan account of the
company that borrowed the loan will be debited
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 3. Bills Receivable and Bills Payable
• Bills of exchange of the holding and subsidiary companies will include bills
accepted and drawn by each other. To that extent, such bills which are
included in the bills receivable should be eliminated while preparing the
consolidated balance sheet.
• However, any bills endorsed or discounted causing a liability to a third party
has to be shown as a separate item on the assets side of the balance sheet.

4. Services Rendered
• Companies owing for services rendered, if entry is already passed by both
the companies, should be subtracted from respective items in the balance
sheet.
• In case no entry is entered till now, such amount should be reduced from
revenue profit of the subsidiary company and added to the P&L A/e of the
holding company

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 Contingent Liabilities
• Transactions that may become liabilities in future are contingent liabilities.
It may or may not occur. It is not certain
• Example: (1) Bills endorsed to creditors and discounted with Bank
(2) Investment in partly paid shares etc.

Treatment
• Contingent liability involving a third party is to be shown as a "foot note"
to the consolidated balance sheet (External contingent liability).
• Contingent liability involving the holding company and its subsidiaries is
not to be shown as a footnote to consolidated balance sheet. (It will be
shown as liability in the consolidated balance sheet) (Internal contingent
liability]

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 Unrealized Profit in Stock
• The holding company or the subsidiary, at times, has in its stock goods
purchased from the other company that were sold at profit. Hence, the
stock includes the unrealized profit charged by the selling company.
• Such unrealized profit has to be eliminated from closing stock.

Treatment:
• First, the unrealized profit value would be deducted from the profit of the
subsidiary company, Then it would be deducted from the closing stock.
While preparing consolidated balance sheet, the unrealized profit should
be reduced from the stock on the assets side of B/S) and from the P&L A/c
(on the liabilities side of B/S)

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 Preference Share Capital In Subsidiary
Company
Treatment:

(i) Preference share capital in subsidiary company has to be shown in the

consolidated balance sheet along with minority interest.

(ii) While ascertaining the cost of control, amount paid by the holding
company is added to the amount paid for equity shares. Face value of
preference shares is reduced. Any difference between the face value and the
amount paid is adjusted with goodwill/capital reserve.

(ii) Any dividend due on the preference shares up to the date of acquisition
is also reduced while computing cost of controls, after deducting it from
capital profits.

(iv) Any dividend due on the preference shares for the post-acquisition
period is treated as revenue dividend payable.

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(v) Minority share of preference shares is to be included in minority interest
along with pre-acquisition dividend payable to the minority
(vi) Premium payable on redeemable preference shares has to be provided for
by annual installments over the period between the date of the balance sheet
and the date of redemption.
(vii) In case the profits of subsidiary company are not sufficient to provide for
arrears of dividends, then it is not permitted to provide for such arrears from
the consolidated profits of the holding and subsidiary Company

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 REVALUATION OF ASSETS

• Any increase in the value of any fixed assets is to be treated as capital

profits, whether it is in pre-or post-acquisition period.
• Such capital profits will be apportioned between capital reserve and
minority interests.
• The proportion of increase of the holding company is to be taken to
investment account. This will reduce the cost of control/goodwill.
• In case, any decrease in the value of fixed assets is to be treated as capital
loss. This will increase the cost of control/goodwill or reduce the capital
reserve. But, it is a revenue loss, if the revaluation occurs in the post-
acquisition period.
Adjustment for depreciation:
• If the value of fixed assets increases (revaluation profit), depreciation
charge also will be increased accordingly. This is to be deducted from the
revenue profits of the subsidiary company
• If the value of fixed assets decreases, depreciation will also be decreased
proportionately. This is to be added to the revenue profits of the subsidiary
company.
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 BONUS SHARE ISSUED BY SUBSIDIARY COMPANY

Treatment: "Source of profit" out of which the bonus issued is the basis of
accounting treatment. They are:
1. Bonus shares issued out of capital profits (or) pre-acquisition profits.
2. Bonus shares issued out of revenue profits (or) post-acquisition profits.

• Bonus issue out of capital profits: This does not have any accounting effect.
The reason is that while determining the cost of control/goodwill, the share of
the holding company in the pre-acquisition profit is reduced and the paid-up
value of shares held is increased. At this juncture, the issue of bonus shares will
in no way affect the cost of control. Minority share of the bonus is added to the
minority interest.
• Bonus issue out of revenue profits: The amount of bonus is reduced from
revenue profit before apportioning the revenue profits in the holding minority
ratio.
While calculating "cost of control", the holding company's share of bonus is
deducted. This will result in decrease in goodwill to the extent of the holding
company's share of bonus. Minority share of the bonus is added to the
minority interest.

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 Dividend
Category I: Payment of dividends entirely from the pre-acquisition profits:
Treatment: It is treated as capital gains.
• On receipt of dividend, the following entry has to be passed:
Bank A/c Dr.
To investment in shares of subsidiary company A/c
• This type of dividends will not be utilized for distributing dividends to the
shareholders of the holding company.
Important notes:
• If the dividend is paid wholly out of pre-acquisition profits, it has to be
appropriated from previous years' profits.
• Holding company's share has to be adjusted towards cost of control or
capital reserve.
• Holding company's shares has to be deducted from the consolidated P&L
A/.
• If by mistake this type of dividend is credited to P&L A/c of the holding
company, it has to be rectified by debiting P&L A/c and crediting investment
A/c

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 Category II: Payment of dividends entirely from post-acquisition profits
• It is treated as revenue income.
• Entry
Bank A/c Dr....
To P&L A/c of the holding company.
• This type of dividend can be utilized to distribute dividends to the shareholders
of the holding company.
Category III: Payment of dividends partly out of pre-acquisition profits and partly
out of Post-acquisition profits.
Accounting Treatment
• For pre-acquisition profit: (Capital profit) (As in Category 1)
Bank Account
To Investment in Shares of Subsidiary Company
• For post-acquisition profit: (Revenue receipt)
Bank A/c Dr....
To Profit & Loss A/c
(OR)
In a combined (compound) entry as follows:
Bank A/c Dr..
To Investment in Shares of Subsidiary Company
To P&L A/c
• This means that the proportion of dividend out of pre-acquisition profit has to be
credited to investment account and the proportion of dividend out of post-
acquisition profit has to be credited to profit andCompany
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 Goodwill (Goodwill Appearing in the Balance Sheet of Subsidiary co.)
Accounting Treatment
• Approach 1: Add: Goodwill Already Appearing in the Balance Sheet of
Subsidiary Company to the Goodwill and/or Cost of Control in the
Consolidated Balance Sheet.
• Approach 2: Add: Only Holding Company's Share to the Cost of
Control/Goodwill from the goodwill of the Subsidiary Company.

Proposed Dividend
• Such amount should be added to current year's profits of the
subsidiary company.
• Then, cost of control and minority interest should be determined.
• Its share in the proposed dividend should be deducted from minority
interest.
• Finally, it should be shown as a separate item on the liability side of
the consolidated balance sheet under the head "Provisions".
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 INTERIM DIVIDEND PAID BY SUBSIDIARY COMPANY
Accounting Treatment
• Interim dividend paid should be added to the balance of current year profit
of subsidiary company
• Then, share of holding company should be deducted from the consolidated
profit.
• Minority's share of interim dividend should be deducted from minority's
interest.
Note: It should be noted that interim dividend should not be shown in the
consolidated balance sheet.

Miscellaneous Expenditures
Accounting Treatment:
Approach I
• Holding company's share in these items should be added to the cost of
control or deducted from the capital reserve.
• Share of minority interest in such items should be deducted from the
minority interest itself
Approach II:
• These should be deducted from the pre-acquisition profits (capital profit).
Then it is apportioned between holding company and minority interest in
the holding minority ratio.
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 Consolidated Profit & Loss Account
Consolidated profit & loss account is prepared to depict the
aggregate profit of the group as a whole and also profit or loss of
each individual company in the group.

Preparation of Consolidated Profit & Loss Account

Step 1 : P&L A/C is to be present in columnar form. So, on both the

sides of the accounts (Dr & Cr)
i) one column is opened for each company
ii) one column for adjustments
iii) The column for total amount
Step 2 : All the items (Revenue & Expenses)are shown as is done in
the preparation of ordinary P&L A/c
Step 3: Inter company transactions have to be eliminated in total column. Details have
to be entered In column for adjustments.
i) Purchase & sales within the group should be eliminated on both the sides of
the accounts.
ii) Similarly, interest on debentures and dividend received should be eliminated
on both the sides of the account.
Step4: After entering all the required items, the accounts are balanced to
arrived at profit & loss of each individual company and group.
Step5: Holding company share of pre-acquisitions profit is to be determined.
Then, this amount is to be debited to the subsidiary and also to be
credited to cost of control or capital reserve.
Step6: In the same manner minority interest have to be determined in the
subsidiary company profits., then it is to be debited to subsidiary
company and also to be shown in total column.
Step7: Provisions for unrealized profit in stock, if any is to be ascertained and
to be debited to the holding and subsidiary company as the case may
be. Then it is to be debited to stock reserve account.
Step8: All such items as debited above (step 5 6&7) should be shown in the
column of respective companies and in the total column.
Step9: Only balance in the total column is to be carried to consolidated
balance sheet, to be shown as P&L A/c
THANK YOU…!!!!

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