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Background of Consolidation Financial Statement
Modern accounting was developed in Italy in the late 15th
century. It was only at the
beginning of the 20th century that consolidated financial statements arose in USA.
Corporations in Europe followed during the 1920s and 1930s. It wasn't until the 1940s,
however, that legislation began to handle the subject.
One of the main reasons why legislation was introduced in Sweden was the Kreuger Crash
of the early 1930s. The empire of Ivar Kreuger was composed of companies all over the
world. The companies often had different financial years. Due to possibilities to transfer
gains and losses between the companies, all companies were able to show profits. Assets
were sold between the companies with profit close to the year-end closing for the selling
company. When the bubble burst the fact came out that the companies were overvaluing
their assets. These transactions would not have resulted in these horrid consequences if
there had been demands for consolidated financial statements with elimination of internal
income/expense, profits/losses, assets and liabilities.
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Introduction
This AS comes into effect in respect of accounting periods commencing on or after 1-4-2001.
AS 21 lays down principles and procedures for preparation and presentation of consolidated
financial statements. Consolidated financial statements are presented by a parent (holding
company) to provide financial information about the economic activities of the group as a
single economic entity. A parent which presents consolidated financial statements should
present their statements in accordance with this standard but in its separate financial
statements, investments in subsidiaries should be accounted as per AS 13.
Joint accounts for the companies in the groups, the elimination of shares, the adjustments etc.
form the consolidated financial statements. Enclosure 1 shows a group consisting of a parent
company with two subsidiaries. The first subsidiary has been part of the group for a number
of years. The second subsidiary was acquired by the parent company during the past year.
Based on these conditions the acquired equity is eliminated together with the acquired income
statement of subsidiary.
Depreciations are made on the acquired surplus values. The depreciations reduce deferred
tax. Internal income, expenses and the result are adjusted along with internal receivables and
liabilities. Finally, untaxed reserves are converted to non- restricted equity and deferred tax.
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What are Consolidated Financial Statements (CFS)?
Consolidated financial statements are fiction. It shows the result and position that would have
occurred if the parent company had directly bought the assets and liabilities of the subsidiary
instead of the shares.
CFS are made using a cross- indexed summary of similar assets, liabilities, income and costs
for the different group companies. Everything should be valued according to the same
principles, recalculated to the same currency and closed at the same date. Since the objective
is to show the group as if they were one company, all internal balances and earnings must be
eliminated and only show profits/losses that are earned by the parent company or by the
subsidiaries after they joined the group.
The acquisition in the parent company of a subsidiary is regarded as an acquisition of the
assets and liabilities of the subsidiary in CFS. The shares in the subsidiary are substituted for
the assets and liabilities of the subsidiary. The assets and liabilities are revaluated to the
acquisition cost of the parent company.
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Meaning &Definition vide as 21
For the purpose of this Standard, the following terms are used with the meanings
specified:
- A parent (also known as a Holding Company) is a company that has one or moresubsidiaries. The company which has control over another company is known as the
Holding Company (Parent company).
- A subsidiary is an enterprise that is controlled by another enterprise (known as theparent). The company over which control is exercised is called the Subsidiary
Company.
- A group is a parent and all its subsidiaries.GROUP as an accounting entity
The accounting concept of Entity can be extended to a group of companies
controlled by a parents company. Such group, made up of the parents + subsidiary
companies, is regarded as a single entity for the purpose of accounting. The financial
statements of all companies in the group are added together (consolidated).
- Consolidated financial statements are the financial statements ofagroup presented as those of a single enterprise.
- Equity is the residual interest in the assets of an enterprise afterdeducting all itsliabilities.
- Minority interest is that part of the net results of operations and ofthe net assets of asubsidiary attributable to interests which are not owned, directly or indirectly through
subsidiaries, by theparent.
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- Control:(a)The ownership, directly or indirectly through subsidiaries, of more than one-half of
the voting power of an enterprise; or
(b)control of the composition of the board of directors in the case of a company or ofthe composition of the corresponding governing body in case of any other enterprise so
as to obtain economic benefits from its activities.
Objectives
The objective of this Statement is to lay down principles and procedures for preparation and
presentation of consolidated financial statements. Consolidated Financial Statement is
prepared by the holding/parent company to provide financial information regarding the
economic resources controlled by its group and results achieved with these resources.
This consolidated financial statement is prepared by the parent company in addition to the
financial statement prepared by the parent company for only it's own affairs. Hence parent
company prepares two financial statements,one for only its own affairs and one for taking the
whole group as one unit in the form of consolidated financial statement. Consolidated
financial statements usually comprise the following:
- Consolidated Financial Account- Consolidated Profit & Loss Statement- Notes to Accounts, other statements and explanatory material- Consolidated Cash Flow Statement, if parent company presents its own cash flow
statement.
While preparing the consolidated financial statement, all other ASs and Accounting Policies
will be applicable as they are applied in parent companys own financial statement.
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Scope
a. This Standard should be applied in the preparation and presentation of consolidated
financial statements for a group of enterprises underthe control of aparent.
b. This Standard should also be applied in accounting for investments in subsidiaries in
the separate financial statements of aparent.
c. In the preparation of consolidated financial statements, other AccountingStandards also
apply in the same manner as they apply to the separate financial statements.
d. Exclusion
In the following cases the consolidation is not done
- Amalgamation- Associates- Joint ventures- Gratuity / PF Trust of sunsidiaries whose composition of the governing bodies is
controlled by the holding company. Since the objective of control over such entities si
not to obtain economic benefits from their activities, these are not considerd for the
purpose of preparation of consolidated financial statements.
- Subsidiary where control is Temporary or restricated.
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Advantages of CFS
The main advantages of consolidation are given below:
a. Overall Picture: From the consolidated financial statements, the users of accountscan get an overall picture of the holding company and its subsidiaries. Consolidated
profit and loss account gives the overall profitability of the group after adjustment of
unrealized profit involved in mutual transaction and division of profit of the
subsidiaries into capital and revenue. Similarly Consolidated Balance Sheet shows
the state of affairs of the group after adjustments of mutual indebtedness and putting
separately the minority interest.
b. Share Value of Holding Co.: Intrinsic share value of the holding company can becalculated directly from the Consolidated Balance Sheet.
c. Return on Investments in Subsidiaries: The holding Company controls itssubsidiary. So its return on investment in subsidiaries should not be measured in the
terms of dividend alone. Consolidated Financial Statement provides information for
identifying revenue profit for determining return on investment.
d. Acquisition of subsidiary: the Minority Interest data of the Consolidated FinancialStatement indicates the amount payable to the outside shareholders of the subsidiary
company at book value which is used as the starting point of negotiations at the time
of acquisition of a subsidiary by the holding company.
e. Evaluation of Holding Company in the market: The overall financial health ofthe holding company can be judged using Consolidated Financial Statement. Those
who want to invest in the shares of the holding company or acquire it, need such
data.
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Disadvantages
a. Credit Implications : Just as much as consolidation can improve your credit, youcan also lower your credit profile by consolidating with a person or business with
worse credit than your own. Unless both parties have similar credit profiles, it is
likely that one party is taking a hit to their credit to some degree. This can be
minimal depending on the advantages of other factors, but it could be a significant
impairment to your ability to get lines of credit at good rates..
b. Shared Information : It is important to trust the individuals involved in yourconsolidation. If the financial change is between spouses and individuals, it is likely
you already trust that person with having access to your personal financial history
and credit information. In a business situation, though, this can be dangerous .
c. Changed Debt-to-Income Ratio : Different individuals and businesses havedifferent amounts of debt and income. A healthy debt-to-income is desired, with
debts comprising only a fraction of total earned income. The smaller this ratio is, the
better for both the credit and financial stability.
Because of the multiple ways in which this can affect personal finances or a
company's financial profile, it is important that the debt-to-income ratios of all
parties be examined. If you are taking on much more debt at the gain of minimal
income -- particularly income that does not cover the debt or does not seem
promising -- your party may be at a distinct disadvantage.
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Contents of CFS
1. Which Statements: Consolidated financial statements normally includea. Consolidated balance sheet,
b. Consolidated statement of profit and loss, andc. Notes, other statements and explanatory material that form an integral part thereof.d. Consolidated cash flow statement is presented in case a parent presents its own cashflow statement.
2. Format: The consolidated financial statements are presented,to the extent possible, inthe same format as that adopted by the parent for its separate financial statements.
Basis of Consolidation
In preparing CFS, the financial statements of the parent and its subsidiaries should be
combined on a line by line basis adding together like items of assets, liabilities, income and
expense.
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Format : 1
Working Note for Calculation
I. Date of Acquisition of ControlThe date on which investment in the subsidiary is made.
II. % of HoldingHow much percent of share holding company acquire & how much for minority company ?
III. Capital ProfitIf acquisition is on last day of the year; then all profit during the year are Capital Profits.
These profits are divided between Holding & Minority Company.
IV. Revenue Profit
If acquisition is on first day of the year; then all profit during the year are Revenue Profits.
These profits are divided between Holding & Minority Company.
V. Cost of ControlCost of investment in subsidiary company as per A/C of holding company XX
(-) Normal value / face value XX
(of share held in subsidiary company)
Capital profit of Holding company XX
Dividend for pre acquisition period XX
(+) Goodwill (-) Capital reserve XX
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VI. Minority interestNominal value share held by minority XX
(+) Share capital profit of minority XX
(+) share of revenue profit XX
VII. Reserve & Surplus (holding company)P/L A/C XX
(+) Share of Revenue profit XX
Format : 2 Old Schedule
Consolidated Balance Sheet of Holding & Subsidiary company
Liability Rs. Assets Rs.
Share capital XX Fixed Assets (net) XX
Reserves & Surplus XX Goodwill XX
Minority interest XX Investments XX
Secured Loans XX Current Assets, Loan & Advances XX
Unsecured Loans XX Misc. Exp. Not W/O XX
Current liabilities & Provisions XX
XX XX
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Revised Schedule VI
Consolidated Balance Sheet of Holding & Subsidiary company
Particulars Schedule Current Yr. Previous
Yr.
Equities & Liabilities
a. Shareholders fundShare Capital XX
Reserves & Surplus XX
b. Non Current LiabilitiesBonds / Debentures XX
Loan from Bank XX
Loan from others XX
Public Deposits XX
Deffered Tax Liability XX
c. Current LiabilityShort term Borrowing XX
Trade payable XX
Other Current Liability XX
Short term Provision XX
Total XX
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Assets
d. Non Current assetsFixed assets XX
Tangible assets XX
Intangible assets XX
Capital WIP XX
Non Current investment XX
Long Term Loan / Advances XX
e. Current AssetsCurrent Investment XX
Inventories XX
Trade Receivable XX
Cash & Bank XX
Short Term Loan / Advances XX
Other Current Assets XX
Total XX
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Steps in Consolidation Vide As 21
In order that the consolidated financial statement presents financial information about the
group as that of a single enterprise, the following steps should be taken:
1. Eliminate Parents Cost of Investment & portion of EquityInvestment made by Holding Company in the equity shares of subsidiary companies is
replaced by the subsidiarys assets & liassbility. The Holding Companys Investment in
shares of Subsidiary and the corresponding Equity of the Subsidiary held by the Holding
Company is set off against each other.
E.g. 1) (100% subsidiaryeliminating investment)
B/S as at 31 December, 2012
Liability H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of rs. 10 each 100000 50000 Sundry assets 150000 80000
Sundry creditors 100000 30000 Investment 5000 shares
at par
50000
200000 80000 200000 80000
Note : Invt. which is made by holding company in the subsidiary company is replaced by
the subsidiaries assets & liabilities. The invt. a/c of H Ltd. And the capital of S Ltd. is set
off against each other.
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 10,000 Equity
Shares of Rs.10 each, fully paid H 100000
Fixed Assets (Net) NIL
Reserves & surplus NIL Investment NIL
Minority interest NIL C.A, Loans & advance
Sundry Assets H 150000
S 80000 230000
Secured Loans NIL MISC. Exp. Not W/O NIL
Unsecured Loans NIL
Current Liabilities & Provisions
Sundry Liabilities H 100000
S 30000 130000
Total 230000 230000
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2. Calculate Goodwill or Capital Reserve Arising on InvestmentThe difference between the investment and net worth will give rise to goodwill or Capital
Reserve.
GoodwillAn investment made at a Premium gives rise to goodwill . any excess of the cost to
the parent of its investment in a subsidiary over the net worth of the subsidiary, at
the date on which investment in the subsidiary is made, should be treated as
goodwill and recorded as an asset in the CFS.
E.g 2) (100% subsidiary
Goodwill on eliminating investment)
B/S as at 31 December, 2012
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of rs. 10 each 100000 50000 Sundry assets 130000 80000
Sundry creditors 100000 30000 Investment 5000 shares
at par
70000
200000 80000 200000 80000
Note :
Cost of Control
Cost of investment of Holding Company 70000
(-)Share of amount of equity of Subsidiary 50000
Goodwill in CBS 20000
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 10,000 Equity
Shares of Rs.10 each, fully paid H 100000
Fixed Assets (Net) NIL
Reserves & surplus NIL Goodwill 20000
Minority interest NIL Investment NIL
Secured Loans NIL C.A, Loans & advance
Sundry Assets H 130000
S 80000 210000
Unsecured Loans NIL MISC. Exp. Not W/O NIL
Current Liabilities & Provisions
Sundry Liabilities H 100000
S 30000 130000
Total 230000 230000
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Capital ReserveAn investment made at a Discount gives rise to Capital Reserve. When the cost to
the parent of its invt. in a subsidiary is less than the net worth of the subsidiary, at
the date on which investment in the subsidiary is made, should be treated as Capital
Reserve and recorded as an asset in the CFS. It is negative cost of control.
E.g 3) (100% subsidiaryCapital Reserve on eliminating investment)
B/S as at 31 December, 2012
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of rs. 10 each 100000 50000 Sundry assets 170000 80000
Sundry creditors 100000 30000 Investment 5000 shares 30000
200000 80000 200000 80000
Note :
Cost of Control
Cost of investment of Holding Company 30000
(-)Share of amount of equity of Subsidiary 50000
Goodwill in CBS (-)20000
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 10,000 Equity
Shares of Rs.10 each, fully paid H 100000
Fixed Assets (Net) NIL
Reserves & surplus
Capital Reserve 20000
Investment NIL
Minority interest NIL C.A, Loans & advance
Sundry Assets H 170000
S 80000 250000
Secured Loans NIL MISC. Exp. Not W/O NIL
Unsecured Loans NIL
Current Liabilities & Provisions
Sundry Liabilities H 100000
S 30000 130000
Total 250000 250000
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3. Calculate Minority InterestNormally, the Holding company hold only some shares say (3/5th) and the remaining(2/5th)
may be held by outsiders. Such interest of the outsiders is known as Minority Interest.
According to AS 21, Minority Interest is that part of the net results of operations and of the
net asset of a subsidiary attributable to interest which are not owned, directly or indirectly
through subsidiary, by the parent.
Minority interest should be presented in the consolidated balance sheet separately from
liabilities and the equity of the parents shareholders under the heading minority interest.
4. Analyse Profits of Subsidiary into Profits before and after AcquisitionAll reserves and profits of subsidiary company should be classified into pre and post
acquisition reserves and profits. We have analyse whether the investment is made on the
last day of the year or on the first day of the year or during any other day in the year.
Acquisition on last day :If the acquisition is on the last day of the current accounting year of the subsidiary, its
entire balances in the P&L a/c and reserves shown in the closing balance sheet of the
current year are taken as capital profits.
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E.g 4) Acquisition on Last Day of the Year
B/S as at 31 December, 2012
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of rs. 10 each 100000 50000 Sundry assets 65000 60000
Profit and Loss A/c 20000 5000 Investment 5000 shares
in S Ltd. 75000
General Reserves A/c 10000 4000
Sundry Liabilities 10000 1000
140000 60000 140000 60000
H Ltd. acquired the shares of S Ltd. on 31st
December 2012. Prepare a consolidated balance
sheet.
Working Note:
I. Date of Acquisition of ControlH Ltd. acquire control in S Ltd. as on 31
stDecember, 2012
II. Capital ProfitProfit & Loss A/c on Date of Acquisition 5000
General Reserve on Date of Acquisition 4000 9000
III. Cost of ControlCost of investment in S Ltd. 75000
(-)Paid up value of shares 50000
Capital profit of Holding company 9000 59000
Goodwill 16000
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 10,000 Equity
Shares of Rs.10 each, fully paid H 100000
Fixed Assets (Net) NIL
Reserves & surplus
Capital Reserve
Consolidated P & L A/c
10000
20000
Goodwill 16000
Minority interest NIL Investment NIL
Secured Loans NIL C.A, Loans & advance
Sundry Assets H 65000
S 60000 125000
Unsecured Loans NIL MISC. Exp. Not W/O NIL
Current Liabilities & Provisions
Sundry Liabilities H 10000
S 1000 11000
Total 141000 141000
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Acquisition on first day :If the acquisition is on the first day of the current accounting year of the subsidiary, its
entire balances in the P&L a/c and reserves shown in the closing balance sheet of the
previous year is taken as capital profits.
E.g. 5) Acquisition on First Day of the Year
B/S as at 31 December, 2012
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of Rs. 10
each
2000000 600000 Freehold premises 900000 240000
Profit and Loss A/c 600000 350000 Plant & M/C 700000 320000
General Reserves A/c 800000 250000 Furniture 160000 60000
Sundry creditors 200000 140000 Debtor 600000 340000
Stock 640000 320000
Investment 40000
shares in S Ltd. 520000
Cash in hand 80000 60000
3600000 1340000 3600000 1340000
Adjustment:-
X Ltd. purchase the share of Y Ltd. on 1 January,2012 when balance in P/L A/c & G.R were
Rs.150000 & Rs.160000 respectively then included in Drs. In X Ltd. Rs. 30000 due from Y
Ltd. Prepare Consolidated b/s of XY Ltd.
Working Note:
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I. Date of Acquisition of ControlH Ltd. acquire control in S Ltd. as on 1st January , 2012
II. % of HoldingH Ltd. (holding company) = 3200/4000*100 = 80%
S Ltd. (minority company) = 800/4000*100 =20%
III. Capital ProfitBalance in P/L a/c = 150000
General Reserve = 160000
310000
Capital Profit divided into :-
H Ltd. = 310000*2/3 = 206667
Minority company = 310000*1/3 = 103333
IV. Revenue ProfitBalance in G.R = 250000
(-)G.R as on 1.01.12 = 160000
Transfer during the year 90000
Bal. in P/L a/c as on 31.12.12 350000
(+) Transfer to G.R 90000
440000
(-) Bal. in P/L a/c as on 1.1.12 150000
Revenue profits 290000
Revenue Profit divided into :-
H Ltd. = 290000*2/3 = 193333
Minority company = 290000*1/3 = 96667
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V. Minority interestNominal value of 20000 shares 200000
(+) Share in capital profit 103333
(+) share in revenue profit 96667
400000
VI. Reserve & Surplus (holding company)Bal. in P/L A/C 600000
(+) Share of Revenue profit 193333
793333
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December, 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 10,000 Equity
Shares of Rs.10 each, fully paid H 2000000
Fixed Assets (Net)
Freehold premise
Plant & M/C
Furniture
1140000
1020000
220000
Reserves & surplus
General Reserve
Consolidated P & L A/c
86667
800000
793333
Cash 140000
Minority interest 400000 C.A, Loans & advance
Inventories
Debtors
960000
910000
Secured Loans NIL MISC. Exp. Not W/O NIL
Unsecured Loans NIL
Current Liabilities & Provisions
Sundry Creditors (340000-30000) 310000
Total 4390000 4390000
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Acquisition in mid year or during Year :If the acquisition is during any other day of the current accounting year of the subsidiary
its balances in the P/L a/c and reserves shown in the available balance sheet are to be
divided between Capital Profits and Revenue Profits.
E.g. 6) Acquisition in mid Year
B/S as at 31 December, 2012
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital of Rs. 1 each 12000 50000 Sundry assets 20000 8000
Profit and Loss A/c 2000 1500 Investment 5000 shares
in S Ltd. 6500
General Reserves A/c 5000 500
Sundry creditors 7500 1000
26500 8000 26500 8000
Shares were acquired by H Ltd. on 1st October, 2012. Reserves in S Ltd. show opening
balance b/d. P/L A/c in S Ltd. show the profits earned during the year.
Prepare CBS
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Working note :
I. Date of Acquisition of ControlH Ltd. acquire control in S Ltd. as on 1
st
October, 2012
Pre acquisition period (Capital profit) 1.4.12 - 30.9.12
Post acquisition period (Revenue profit) 1.10.12 - 31.3.12
II. Capital ProfitProfit & Loss A/c (1500/2) 750
General Reserve 500
1250
III. Revenue ProfitProfit & Loss A/c (1500/2) 750
IV. Cost of ControlCost of investment in S Ltd. 6500
(-)Paid up value of shares 5000
Capital profit of Holding company 1250 6250
Goodwill in CBS 250
V.
P&L A/c
P & L A/c of H Ltd. 2000
(+) RP of S Ltd. 750
Consolidated P & L A/c 2750
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Solution:-
Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December, 2012
Liability Rs. Assets Rs.
Share capital
Equity share capital 12,000 Equity
Shares of Rs.1 each, fully paid H 12000
Fixed Assets (Net) NIL
Reserves & surplus
General Reserve (H)
Consolidated P & L A/c
5000
2750
Goodwill 250
Minority interest NIL C.A, Loans & advance
Sundry assets H 20000
S 8000 28000
Secured Loans NIL MISC. Exp. Not W/O NIL
Unsecured Loans NIL
Current Liabilities & Provisions
Sundry Creditors H 7500
S 1000 8500
Total 28250 28250
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5. Intra-Group AdjustmentIt is natural for a company to sell goods to its subsidiary and vice versa. Usually goods
are sold at normal selling price. For the purpose of consolidation of financial statement,
profit on goods received from the other company of the same group but sold away before
the balance sheet date raises no problem. But in respect of such goods not yet sold, the
unrealized profits are to be eliminated. Also unrealized losses resulting from intra group
transactions should also be eliminated unless cost cannot be recovered.
There is some of the adjustment which is used in a Consolidation:
Dividends: The holding company, when it receives a dividend from subsidiary company,
must distinguish between the dividend received out of capital profits and that out revenue
profits. The dividend received out of capital profits is credited to Investment Account, it
being a capital receipt. Dividend received out of revenue profits is, being revenue income,
credited to the Profit & Loss Account.
Revaluation of Fixed Assets: For ascertaining the fair price for acquiring shares, the holding
company may revalue the fixed assets of the subsidiary company. The assets may be revalued
upwards or downwards. The depreciation on the difference between the revalued amount and
the book value also need to be adjusted, depending on the details available.
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Issue of Bonus Share out of Pre acquisition Profits: While calculating the cost of control,
when one the one hand holding companys share in the pre-acquisition profit is reduced
(because of capitalisation of profit), on the other hand, the paid up value of shares held
increase. Thus, there is no effect on cost of control of the bonus shares issued out of pre-
acquisition profits.
Issue of Bonus Share out of Post acquisition Profits: When a subsidiary company
capitalises profits by the issue of bonus shares out of the post-acquisition profits, it is
necessary that holding companys share in the revenue profits of the subsidiary company be
calculated only after making adjustments for such bonus shares from the post acquisition
profits. It will have effect of reducing share of holding company in the post-acquisition
profits of the subsidiary company. However, in this case the cost of goodwill will be reduced
because of the increase in paid-up value of shares (without) increasing the cost of shares and
without reducing the pre-acquisition profits of subsidiary company.
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E.g.7) The Balance sheet of H & S Ltd. As on 31.3.2012 were as follow:-
Liability H S Assets H S
Equity Share of Rs. 100
each fully paid up
9000000 400000 L & B 600000 260000
15% Pref. share capital 300000 40000 Plant & M/C - 180000
G.R (1.04.2012) 200000 120000 Invt. in 3000 eq. share of S
Ltd. Purchase on 30.9.2012
480000 -
P/L A/C 280000 180000 Stock 200000 180000
B.P 40000 - Drs. 40000 150000
Crs. 160000 100000 Cash at bank 120000 40000
Preliminary exp. 10000 -
Gwill 70000 60000
Adjustments:-
- 15% dividend on both types of shares was paid in Oct. 2012 for the year ended 31stmarch 2012 H Ltd. credited the dividend received to his P/L account.
- Plant & M/C as per a/c was 200000 on 1.4.2012 H Ltd. revalued it by upward amountby 100000 which is not recorded.
- There was a bonus issue of equity shares of 40000 out of post acquisition profit by SLtd. which is not recorded.
- Credit balance of P/L a/c on 1.4.2012 was 106600 of S Ltd.- Included in creditors of S Ltd. are 40000 for goods supplied by H Ltd. also includedin S Ltd. stock of goods supplied by H Ltd. remain unsold & H Ltd. charge profit at 25 %
on sales.
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Working Note :
I. Date of acquisition of control :-H Ltd. acquire control in S Ltd. As on 30 September 2000
II. Percentage of holding :-H Ltd. = 3000/4000 = 75%
Minority = 1000/4000 = 25%
III. Capital profit as on 1.04.2001G.R 120000
P/L a/c (as on 1.4.2000) 1066000
(+) Current year profit upto 30.9.2000 69700
(-) dividend for year ended 31.3.2000 296300
Pref.share capital (40000*15%) 6000
Equity share capital (400000*15%) 60000
(+) increase in plant & M/C 100000
(-) preliminary written off 10000
320000
Capital profit allotted into :-
H Ltd. = 320000*3/4 = 240225
Minority interest = 320000*1/4 = 80075
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IV. Cost of control
Cost of investment in S Ltd. 480000
(-) nominal value of shares
3000 share @ 100 = 300000
300 bonus @ 100 = 30000
Dividend for pre acquisition
300000*15% = 45000
Capital profits = 240225 615225
Capital reserve (-)135225
V. Revenue profitRevenue profit of S Ld. 69700
(-) issue of bonus share 40000
Dep. on plant & M/C (100000*10%*6/12) 5000
24700
Revenue profit allotted into :-
H Ltd. 24700*3/4 = 18225
Minority interest 24700*1/4 = 6175
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VI. Minority InterestNominal value of share
1000 shares @ 100 100000
100 bonus @ 100 10000
15% pref. share capital 40000
Share in capital profit 80075
Share in revenue profit 6175
236250
VII. Resrve & Surplus of H Ltd.Balance in P/L a/c 280000
(+) share in revenue 18225
(-) dividend trf. to invt. a/c 45000
(-) unrealized profits in intercompany transaction 10000
243525
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Solution:-
Consolidate balance sheet of HS Ltd. As on 31.3.2001
Liability Rs. Assets Rs.
Equity share of Rs.100 each
fully paid
900000 Gwill 130000
Pref. share capital of H Ltd. 300000 L & B 860000
G.R 200000 Plant & M/C 605000
P/L a/c 243525 Stock 370000
B.P 40000 Drs. 150000
Crs. 220000 Cash 160000
Minority interest 236250
Capital reserve 135225
2275000 2275000
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Summary
A company that owns more than 50% of the votes in another company is a parent company to the
subsidiary owned. Together they form a group which is obligated to submit consolidated financial
statements. It is also mandatory to issue consolidated financial statements when a company has
determining influence over another company. Consolidated financial statements are prepared in
order to show all the companies in the group as if they were one.
All companies in the group must apply the same accounting principles and accounting year as the
parent company. Internal income, expenses and profits/losses must be eliminated from the income
statement. The same goes for internal receivables and liabilities in the balance sheet. The
consolidated financial statements are guided by both national and international laws and
recommendations.
The most common method to apply consolidated financial statements is the purchase method. This
method is based on an acquisition analysis which determines the acquired equity of the subsidiary.
The acquired equity is never included in the equity of the group. It is only the equity of the parent
company and profits/losses in the subsidiaries after the acquisition that should be included in the
equity of the group. The acquisition analysis changes constantly as acquired surplus values and
deferred tax are reduced as depreciations and tax expenses.
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BIBLOGRAPHY
Advanced Financial Accounting (M.Com I)Dr. Varsha M.Ainapure
(Sem. I & II)
Edition: September 2010
MANAN PRAKASHAN
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