ppt on holding co

8/3/2019 Ppt on Holding Co.

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A form of CorporateRestructuring


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A company controlling partial or completeinterest in another company.

Corporation that owns enough voting stock

in another corporation to influence its board ofdirectors and therefore to control its policiesand management.

(Atleast 80% of voting stock to gain thebenefits of tax consolidation which include tax-free dividends )


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Ability to control sizeable operations withfractional ownership and small investment.

Take risks through subsidiaries with liabilitylimited to the subsidiary corporation.

Reduces the risk of parent company.


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Partial multiple taxation when less than 80% ofa subsidiary is owned.

Special state and local taxes.

The risk of forced divestiture.


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It is effective from 1.4.2001,mandatory in respect of

all enterprises which present consolidated financial

statement.

For this, the financial statements of the parent andits subsidiaries should be combined on line-by-line

basis by adding together like items of assets,

liabilities income and expenses.


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The following steps should be taken:

The cost to the parent of each subsidiary at the date

on which the investment in each subsidiary is made,should be eliminated.

Any excess of cost to the parent of its investment in

a subsidiary should be described as goodwill to be

recognized as an asset in the consolidated financialstatement.

When the cost to the parent of investment in a

subsidiary is less than the parents proportion of

equity of the subsidiary, the difference should be

treated as a capital reserve in the consolidated

financial statement.


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Minority interest in the net income of consolidated

subsidiaries for the reporting period should be

identified and adjusted against the income of the

group. The parents portion of equity in a subsidiary is

determined on the basis of the information

contained in the financial statements of the

subsidiaries as on the date of investment.


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If the financial statement of the subsidiary are not

available, financial statement for the subsidiaries for

the immediately preceding period are used as thebasis for consolidation.

If an enterprise make two or more investments in

another enterprise at different dates and eventually

obtains the control of the enterprise, the

consolidated financial statement are presented only

from the date on which holding subsidiary

relationship comes in existence.


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The amount of equity attributed to minorities at the

date on which investment in a subsidiary is made.

The minorities share of movements in equity since

the date the parent subsidiary relationship came intoexistence.


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control is intended to be temporary because thesubsidiary is acquired and held exclusivelywith a view to its subsequent disposal in the

near future. It operates under severe long term restrictions

which significantly impair its ability to transferfunds to the parent.


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When the holding company acquires more than half

but less than all the shares of the subsidiary

company, those shareholders who have minority

shares are referred to as minority shareholders.

The interest of the minority shareholders must be

accounted for separately in the consolidated balance

sheet.


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A Minority interest is the proportion of the

subsidiary companys net assets/shareholders fundwhich belong to the minority shareholders.

The value of the Minority interest is the portion ofthe share capital and reserves at the date when the

holding company acquires its controlling interest

and the share of income after acquisition.


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A Ltd. Acquired 80 percent of the shares of B Ltd. ForRs. 40,000. The balance sheet of the two companies

are as under:

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Share Capital(Rs. 10)

Long term liability

Current liabilities

2,00,000

40,000

60,000

50,000

-------

20,000

Fixed Assets

Investment4,000

Shares in B Ltd. At

par.

Current assets

1,90,000

40,000

70,000

40,000

-------

30,000

3,00,000 70,000 3,00,000 70,000

Prepare a consolidated balance sheet.


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Since A Ltd. Holds 80 % of the shares of B Ltd., 20% of the shares of B Ltd. belongs to minority

shareholders, i.e. minority interest is 20 %.

Net assets of B Ltd.: 70,00020,000 = 50,000

80 % of 50,000 i.e. 40,000 belongs to the shareholders of

A Ltd.

20 % of 50,000 i.e. 10,000 belongs to minority

shareholders. This is the minority interest.


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The consolidated balance sheet of A Ltd. And itssubsidiary B Ltd.

Liabilities Amount Assets Amount

Share capital( Rs. 10)

Long term liability

Current liabilities

Minority interest

2,00,000

40,000

80,000

10,000

Fixed Assets:

(1,90,000 + 40,000)

Current assets:

(70,000 + 30,000)

2,30,000

1,00,000

3,30,000 3,30,000


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Minority interestis not the liability but capital of the

group which does not belong to the shareholders of

the holding company.

Minority interestis always calculated at the date of

the consolidated balance sheetnot when theholding company takes the control.


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When the value of Investment in Subsidiary inthe holding companys balance sheet is morethan the book value of the net assets acquired,

the difference represents Goodwill on

Consolidation.


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H ltd. Acquired 80% of the shares of S ltd. For Rs.48,000. thebalance sheet of two co. are as under:-

Liabilities H ltd. S ltd. Assets H ltd. S ltd.

Share capital(Rs.10)

2,00,000 50,000 Fixed assets 1,90,000 40,000

Long termliability

40,000 - Investment4000 share@10each

48,000 -

Currentliabilities

60,000 20,000 Current Assets 62,000 30,000

3,00,000 70,000 3,00,000 70,000


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Liabilities Amount Assets Amount

Share capital(Rs.10)

2,00,000 Goodwill 8,000

Long term liability 40,000 Fixed assets(1,90,000+40,000)

2,30,000

Current liabilities 80,000 Current Assets(62,000+30,000)

92,000

Minority interest

(20% of 50,000)

10,000

3,30,000 3,30,000


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When Holding company purchases the shares ofsubsidiary company at any time during thefinancial year, then the year is divided into two

parts Pre-acquisition period

Post-acquisition period


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General Reserve

Capital Reserve

Profit for the current year

The portion of these, for the period prior topurchase is treated as capital profit for the

Holding company


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Dividend paid out of pre-acquisition profit: The amount of dividend paid by subsidiary company out of pre-acquisition profit

must be appropriated from last years profit.

Holding companys share of the same must be deducted from the amount paid foracquisition of shares in order to ascertain goodwill/capital reserve.

Holding companys share of the same should also be deducted from consolidatedprofit.

Interim dividend paid by subsidiary company: The amount of interim dividend paid by subsidiary company must be added with

current profit.

Minorities share of the same will be deducted from the minorities interest.

Holding companies share should also be deducted from consolidated profit.


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Proposed dividend already shown in the B/S of the subsidiarycompany:

The amount of proposed dividend must be added with current profits.

Minoritys share should be deducted from minoritys interest, which will appearagain separately as a liability.

Proposed dividend recommended by the subsidiary companybut not yet given effect in the accounts:

Simply minoritys share of the proposed dividend should be deducted fromminoritys interest, which will appear again separately as a liability in theconsolidated B/S.

Preference share dividend due:

The amount of preference share dividend, which is due, must be appropriated fromthe current profits before the balance is distributed to the equity shareholders.

Minoritys share of this dividend, if any, should be added with minoritys interest.

Holding companys share is added with consolidated profit.


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Share premium:

When holding company purchases the share of subsidiary company at a premiumthen this premium is shown as goodwill in the asset side.

Calculation of Capital reserve:

Add:Book value of acquired shares of subsidiary company.

Share of holding company in the reserve of subsidiary company for the pre-acquisitionperiod.

Share of holding company in the funds of subsidiary company for the pre-acquisitionperiod.

Share of holding company in the profit of subsidiary company for the pre-acquisition

period.Less:

Purchase price of shares of holding company.


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Contingent liability is the liability whichmay or may not happen. It is customary to

show contingent liabilities as a foot note tothe balance sheet.


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CONTINGENT LIABILITY is:(a) a possible obligation that arises from past events and theexistence of which will be confirmed only by the occurrence

or non-occurrence of one or more uncertain future events notwholly within the control of the enterprise; or(b) a present obligation that arises from past events but is notrecognized because:(i) it is not probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation;

or(ii) a reliable estimate of the amount of the obligation cannotbe made.


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Contingent liability may be of two types:

a) External contingent liability:-this is on

account of a transaction between thecompany & the third party.

b) Internal contingent liability:-this is onaccount of a transaction between thecompanies of the same group.


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While preparing the consolidated balancesheet the external contingent liabilities are

shown as a footnote to the balance sheetwhile the internal contingent liabilities areeliminated from the footnote since theyappear as actual liabilities in the

consolidated balance sheet.


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If there is any change in the valuation of assets at the time of

acquisition of the subsidiary company by the holding

company, the effect of profit or loss on revaluation should bereflected in the Consolidated Balance Sheet

If there is a profit, it will be apportioned and will be used in

calculation of goodwill / capital reserve and minority interest

The revaluation profit will be taken to Investment inSubsidiary Company

Profit will reduce the cost of control on value of goodwill or

capital reserve.

If the revaluation results in a loss, the cost of control onvalue of goodwill or capital reserve will be increased.


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Effect on Depreciation

If the revaluation results in an increase

If depreciation has already been charged, seems to be undercharged

and the amount of extra depreciation is treated as revenue loss

This should be deducted from the P/L account of the subsidiary

If there is a downward revaluation

If depreciation has already been charged, seems to be overcharged and

the amount of extra depreciation should be written off and considered

as revenue profit. This should be added with the P/L account of the subsidiary


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The following are the Balance Sheets of R Ltd & S Ltd. As on 31.12.2006:

(figures in Rs.)

Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.

Equity Share

of Rs 10 each

Profit & Loss

A/C

ExternalLiabilities

4,00,000

50,000

7,50,000

1,00,000

20,000

4,80,000

Equipment

Investment :

9,000 Equity

Shares in S Ltd

On 1.1 2006Current Assets

2,50,000

1,40,000

8,10,000

95,000

5,05,000

12,00,000 6,00,000 12,00,000 6,00,000


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On January 1, 2006, Profit & Loss A/C of S Ltd showed acredit balance of Rs 8,000and Equipment of S Ltd was

revalued by R Ltd at 20% above its book value of Rs

1,00,000 ( but no such adjustment was effected in the books

of S Ltd). Prepare the balance sheet as at 31.12.2006


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Liabilities Rs Assets Rs

Share Capital:

Equity Shares of Rs 10

each

Reserves & Surplus:

Profit & Loss A/c

Current Liabilities:

External Liabilities

Minority Interest

4,00,000

59,900

12,30,000

13,900

Fixed Assets:

Goodwill

EquipmentCurrent Assets

24,800

3,64,00013,15,000

17,03,800 17,03,800


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1) Degree of Control = 9,000 Shares / 10,000 Shares = 9/10th;

Minority Interest = 1/10

2) Capital Profit R ltd S ltd

Pre-acquisition profit 8,000

Revaluation Profit 20,000

(1,20,0001,00,000) -----------28,000 25,200 2,800

3) Post-acquisition Profit

Profit as per Balance Sheet 20,000

- Pre-acquisition profit 8,000

- Depreciation 1,000----------

11,000 9,900 1,100


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R ltd S ltd4) Share Capital 1,00,000

- Minority Interest 10,000 10,000

( 1/10) --------------90,000

Adjusted in Calculation of

Goodwill/ capital Reserves 90,000

Minority Interest 13,900

Calculation of Goodwill/Capital Reserve

Cost of Investments 1,40,000

- Capital Profit 25,200

- Face Value of Shares held 90,000 1,15,200

--------------

Goodwill 24,800


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Particular Equipment Current

Assets

External

Liabilities

Profit &

loss

R LtdS Ltd

+ Revaluation Profit

- Depreciation

2,50,00095,000

3,45,000

20,0003,65,000

1,000

8,10,0005,05,000

7,50,0004,80,000

50,0009,900

3,64,000 13,15,000 12,30,000 59,900

Depreciation :5000/1,00,000 * 100 = 5%,

1,20,000* 5% = 6,000

Difference = 6,000 5,000 = 1,000


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Profit earned by the subsidiary company beforethe holding company acquires its control.

To be considered for calculation of goodwill orcapital reserve

It is split between cost of control and minority

interest


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Profits earned by the subsidiary company afterthe holding company acquire its control.

Not to be considered in the calculation ofgoodwill or capital reserve

Is apportioned between holding company and

minority shareholders.


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At the time of consolidation, inter-companydebts and acceptances which are part of the

same group, are to be cancelled out. Bills discounted with the bank will appear as a

contingent liability in the consolidated balancesheet as a footnote at their face value.


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At the time of preparing consolidated balancesheet, loans and advances recorded in thecurrent account are to be cancelled out.

Differences in the two accounts usually causedby goods-in-transit or cash-in-transit is shownin the consolidated balance sheet as one of theassets.


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

Sharecapital(Rs.10each)

P/L a/cGeneral reserve

Creditors:

External

H ltd.

50000

1000012000

11000

-

40000

60004000

5000

2900

Fixed assets

Debtors

external

S Ltd.Cash at bank

Shares in S ltd.

(3000 shares)

Goods in transitStock

Other investments

20000

9000

30005500

32000

6004000

8900

30000

5000

-1900

9000

12000

TOTAL 83000 57900 83000 57900


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The credit balance of P/L A/c of S Ltd. at the dateH Ltd. bought its shares was Rs. 2000 andgeneral reserve stood at nil.on 31stdec01,therewere goods-in-transit from HlLtd to S Ltd.Rs.600 and cash in transit Rs.100 from S Ltd. ToH Ltd.

Prepare the consolidated balance sheet as at 31stdec01.


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Working Notes:

1) Degree of control 3000/4000=3/4th

Minority=1/4th

Particulars Total H Ltd.sshare

Minorityinterest

Capital profit

Revenue profitProfit as per B/S 6000

Less:capital profit (2000)

Post-acquisition G/R

Share capital

2000

4000

4000

40000

1500

3000

3000

30000

500

1000

1000

10000

12500


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Calculation of Goodwill:

Cost of investment 32000Less: capital profit 1500

Less:face value of shares held 30000

Goodwill 500

Consolidated balance sheet of H Ltd. and S Ltd. as


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Consolidated balance sheet of H Ltd. and S Ltd. ason 31stDec01

Liabilities Rs. Assets Rs.Equity share capital

(Rs.10 each)

General

reserve(12000+3000)P/L A/C(10000+3000)

Creditors(11000+5000)

Minority interest

50000

1500013000

16000

12500

Goodwill

Fixed assets(20000+30000)

Investments(8900+12000)

Stock in transitStock (4000+9000)

Debtors (9000+5000)

Cash in transit

Cash at bank (5500+1900)

500

50000

20900

60013000

14000

100

7400

Total 106500 106500


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CONSOLODATED P&L A/c is prepared toshow the PROFIT of the group so that theshareholders maybe able to know the profits of

the company in which they have made theinvestments


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Transfer of goods within the group should beeliminated, so consolidated p&l a/c eliminatedpurchases and sales within the group

Common income and expenses are eliminated

from consolidated p&l a/c Reserve for unrealised profits on unsold goods

sold by the subs. to the holding co. (or vice versa)is created by debit to consolidated p&l a/c and

credit to the stock reserve a/cConsolidated P&L A/c.Dr.

To stock Reserve a/c


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Interest on debentures and dividends receivedby the holding co. from the subs. Co.(or viceversa) is eliminated from the consolidated p&la/c

No adjustment is required for tax on dividendsor on interest on debentures because thepayment of tax is to be made to the outsiders.

For the share of profit of holding Co. in the pre-acquisition profit of subs. Co. then the record ismade as :

Consolidated p&l a/c.Dr.To capital reserve a/c


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Share of profit of minority shareholders in theprofit of subs. Co. is recorded as :

Consolidated p&l a/c .Dr.

To minority shareholders a/c

Holding Co.s share of the profit set aside forredemption of preference shares is debited toconsolidated p&l a/c and credited to capital

redemption reserve a/c.

Consolidated Trading and P&L a/c of H.LTD and its subsidiary S.LTD


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PARTICULARS H.

ltd

S.

ltd

Adjust Total PARTICULARS H.

ltd

S.

ltd

Adjust Total

To purchase

To cost of goodssold

To gross profit

To generalexpenses

To dep.

To net profit c/d

To minority int.To stock res.

To capital res.

To bal c/d

By sales

By g/p b/d

By dividendrecd

By bal b/d

Consolidated Trading and P&L a/c of H.LTD and its subsidiary S.LTDFor the year ending ..


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Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.

Share Capital: Fixed Assets 500000240000Equity Shares of Rs 10 each Investments infully paid 400000 150000 15000 E. Shares in

General Reserve 50000 40000 SLtd. On 1.1.2001 200000-----P&L Ac. 30000 25000 Current Assets12% Debentures 200000 --- (including Rs10000Current Liabilities and stock-in-tradeProvisions 320000 285000 purchased from

RLtd) 300000


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Particulars Fixed Assets C.Assets C.Liabilities G.ReserveP&LAc.

R Ltd. 500000 300000 320000 50000 30000

S Ltd. 240000 260000 285000 15000 15000

560000 605000 65000 45000

Less :Unrealised

Profit on Stock 2000 2000

740000 558000 605000 65000 43000


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Unrealised profit on stock = 25/125X Rs10000

= Rs 2000.

RLtd. is holding 100% equity shares of

SLtd.Therefore, the entire amount of Rs 2000 isto be provided for unrealised profit.


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A member company may transfer fixed assetsor stock which becomes fixed assets of thetransferee company at a profit. In this case , a

similar problem arises as that seen inconnection with trading stock transfer. At thetime consolidation , unrealised profit should bdeducted from consolidated profit as well as

aggregate value of fixed assets.


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Bonus share out of the profit of pre acquisitionperiod:-

No adjustment is made in consolidated account.

Bonus share out of the profit of post

acquisition period:-

Investment a/c Dr xxx

To capital reserve a/c xxx


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Purchases consideration > (face value of shares + capital

profit)

Difference will be added to goodwill

Purchases consideration < (face value of shares + capitalprofit)

Difference will be added to capital reserve

Dividend on pref. shareProfit of subsidiary company is reduced with that amount

profit of holding company is increased with that amount

Dividend of pref. share belonging to minority share


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Dividend of pref. share belonging to minority shareholder is added in finding out their interest.

If the holding co. has not purchased pref. shares thensuch share holders will be included in minority

interest.

Ex. The holding co. purchased 7500 10%pref. shares of Rs 10 each ofsubsidiary co. and the total 10% pref. share of subsidiary co. is10000

The balance of minority interest is 20000

Total minority interest will be :

Opening balance 20000

Add: dividend 250022500

Add : pref. share not taken by holding co. 25000closing balance of minority interest 47500


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If shares are purchased in two or more blocksthen it is said as purchase of shares ininstalment.

Division of profit between pre and postacquisition will depend upon the lots in whichshares are purchased.


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It will be appropriate to follow a step by stepsystem for analysing the profits between capitaland revenue.

For ex. If the shares are purchased in three

instalments then share of profit should becalculated individually for each installment.


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