EXECUTIVE SUMMARY

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.

The reason why we need to study about ‘Accounting for Holding Companies is because

after studying we will be able to –

Discuss the relevance of holding companies

Understand the concept of subsidiary companies

Know the importance and problems of holding and subsidiary companies

Explain the consolidated financial statements and accounts

Describe cash flow basis accounting

1

Introduction

Financial accounts of holding and subsidiary companies are concerned with classifying,

measuring and recording the transactions of their business. At the end of a period (typically

a year), the following financial statements are prepared to show the performance and

position of the business:

Describing the trading performance of the business over the accounting period

Statement of assets and liabilities at the end of the accounting period (a "snapshot")

of the business

Describing the cash inflows and outflows during the accounting period

Additional details that have to be disclosed to comply with Accounting Standards

and the Companies Act

Description by the Directors of the performance of the business during the

accounting period + various additional disclosures, particularly in relation to

directors' shareholdings, remuneration etc

Financial accounts are geared towards external users of accounting information. To answer

their needs, financial accountants draw up the profit and loss account, balance sheet and

cash flow statement for the company as a whole in order for users to answer questions such

as:

o "Should I invest my money in this company?"

o "Should I lend money to this business?"

2

o "What are the profits on which this company must pay tax?"

Company Law Requirements for Financial Accounts

Every Indian company registered under the Companies Act 1956, is required to prepare a set

of accounts that give a true and fair view of its profit or loss for the year and of its state of

affairs at the year end. Annual accounts for Companies Act purposes generally include:

A directors’ report

An audit report

A profit and loss account

A balance sheet

A statement of total recognised gains and losses

A cash flow statement

Notes to the accounts

If the company is a "parent company", (in other words, the company also owns other

companies - subsidiaries) then "consolidated accounts" must also be prepared. Again there

are exceptions to this requirement.

Comparative figures should also be given for almost all items and analysis given in the year

end financial statements. Exceptions to this rule are given individually. For example, there is

no requirement to give comparative figures for the notes detailing the movements in the year

on fixed asset or reserves balances.

Let us now discuss holding and subsidiary companies to have deeper understanding of

accounts and problems related to these companies.

3

Holding Companies

When a company acquires majority of shares in the ownership or is in a position to control

the management of the other company, the company is called a holding company and the

other is called a subsidiary company. A holding company is able to exercise control over the

management of other companies is to promote combination movement so that competition

may be eliminated, also advantages of monopoly or near monopoly may be enjoyed and

economics in management and production may be secured. Under the following

circumstances a company can become a subsidiary to other company: (i) If a company

acquires all or majority of equity shares in other company (ii) If the other company controls

the management or the composition of its Board of directors (iii)If the company becomes a

subsidiary of another company which itself is a subsidiary of a third company.

Explanation with Example

Suppose, H is holding company of S because 51 % shares are of H in S. S is also of holding

Company of R because S have power to appoint the board of directors of R Company and

then H is also holding Company of R.

A holding company is a company or firm that owns other companies' outstanding stock. It

usually refers to a company which does not produce goods or services itself; rather its only

purpose is owning shares of other companies. Holding companies allow the reduction of risk

for the owners and can allow the ownership and control of a number of different companies.

In the U.S., 80% or more of stock, in voting and value, must be owned before tax

consolidation benefits such as tax-free dividends can be claimed.

4

Sometimes a company intended to be a pure holding company identifies itself as such by

adding "Holdings" or "(Holdings)" to its name, as in Sears Holdings.

In fact, A holding company is a parent company that owns enough voting stock in a

subsidiary to dictate policy and make management decisions. This is generally done through

influence of the company's board of directors.

This doesn't mean that the holding company owns all of the subsidiary's stock, or even a

majority of it. However, holding companies that control 80% or more of the subsidiary's

voting stock gain the benefits of tax consolidation, which include tax-free dividends for the

parent company and the ability to share operating losses.

Main features of Holding Company

1. Holding Company provides the power to work independently to subsidiary company.

Because relationship of holding and subsidiary company is not amalgamation or merge but

both company joins for cutting the cost of competition and getting the benefits of monopoly.

2. Holding company can also deal with subsidiary company and it is also recorded in both

books .

3. Under Company act of India 1956 , it is required to attach the copy of final accounts of

subsidiary company with the annual report of holding company .

5

Advantages of Holding Companies

Acquiring a controlling interest in a subsidiary as a holding company has certain advantages

over a merger:

The ability to control operations with a small percentage of ownership and, thus,

smaller up-front investment

Holding companies can take risks through subsidiaries, and limit this risk to the

subsidiary alone rather than placing the parent company on the line

Expansion can happen through simple stock purchases in the public market, which

avoids the difficult step of gaining approval from the subsidiary's board of directors

Through a holding company operation, a firm may buy 5, 10, or 50 percent of the stock of

another corporation. Such fractional ownership may be sufficient to give the holding

company effective working control over the operations of the company in which it has

acquired stock ownership. Working control is often considered to entail more than 25

percent of the common stock, but it can be as low as 10 percent if the stock is widely

distributed. One financier says that the attitude of management is more important than the

number of shares owned: “If management thinks you can control the company, then you

do.” In addition, control on a very slim margin can be held through relationships with large

stockholders outside the holding company group.

6

Because the various operating companies in a holding company system are separate legal

entities, the obligations of any one unit are separate from those of the other units. Therefore,

catastrophic losses incurred by one unit of the holding company system may not be

translatable into claims on the assets of the other units. However, we should note that while

this is a customary generalization, it is not always valid. First, the parent company may feel

obligated to make good on the subsidiary’s debts, even though it is not legally bound to do

so, in order to keep its good name and to retain customers.

An example of this was American Express’s payment of more than Rs.100 million in

connection with a swindle that was the responsibility of one of its subsidiaries.

Second, a parent company may feel obligated to supply capital to an affiliate in order to

protect its initial investment; General Public Utilities’ continued support of its subsidiaries’

Three Mile Island nuclear plant after the accident at that plant is an example.

And, third, when lending to one of the units of a holding company system, an astute loan

officer may require a guarantee by the parent holding company. To some degree, therefore,

the assets in the various elements of a holding company are not really separate. Still, a

catastrophic loss, as could occur if a drug company’s subsidiary distributed a batch of toxic

medicine, may be avoided

7

Problems of Holding Companies

The holding company model has the following problems:

1. If less than 80% of the subsidiary is owned by the parent, the holding company pays

multiple taxes on the federal, state, and local levels.

Provided the holding company owns at least 80 percent of a subsidiary’s voting stock, the

IRS permits the filing of consolidated returns, in which case dividends received by the

parent are not taxed. However, if less than 80 percent of the stock is owned, and then tax

returns cannot be consolidated. Firms that own more than 20 percent but less than 80 percent

of another corporation can deduct 80 percent of the dividends received, while firms that own

less than 20 percent may deduct only 70 percent of the dividends received. This partial

double taxation somewhat offsets the benefits of holding company control with limited

ownership, but whether the tax penalty is sufficient to offset other possible advantages is a

matter that must be decided in individual situations.

2. A holding company can be forced to dissolve more easily than a single merged operation.

It is relatively easy to require dissolution by disposal of stock ownership of a holding

company operation found guilty of antitrust violations. For instance, in the 1950s Du Pont

was required to dispose of its 23 percent stock interest in General Motors Corporation,

acquired in the early 1920s.

8

Because there was no fusion between the corporations, there were no difficulties from an

operating standpoint in requiring the separation of the two companies. However, if complete

amalgamation had taken place, it would have been much more difficult to break up the

company after so many years, and the likelihood of forced divestiture would have been

reduced.

3. A holding company may expand through the use of leverage or debt, building a complex

corporate structure that can include unrealized values, and creating a risk if interest rates on

debt or the valuation of the assets posted as collateral for loans change dramatically.

9

Subsidiary Company

Section 4 of the companies Act, 1956 defines a subsidiary company as

A company is a subsidiary of another if and only if –

a) That other company controls the composition of its Board of Directors; or

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 respect as the holders of Equity shares exercises or controls more than

half of the total voting power of such company.

ii) Where the first mentioned company is any other company, holds more than half in

nominal value of its Equity share capitals. OR

iii) The company is a subsidiary of any company which is that other company’s

subsidiary.

A subsidiary, in business matters, is an entity that is controlled by a separate higher entity.

The controlled entity is called a company, corporation, or limited liability company; and in

some cases can be a government or state-owned enterprise, and the controlling entity is

called its parent (or the parent company). The reason for this distinction is that a lone

company cannot be a subsidiary of any organization; only an entity representing a legal

fiction as a separate entity can be a subsidiary. Contrary to popular belief, a parent company

does not have to be the larger or "more powerful" entity; it is possible for the parent

10

company to be smaller than a subsidiary, or the parent may be larger than some or all of its

subsidiaries (if it has more than one).

The parent and the subsidiary do not necessarily have to operate in the same locations, or

operate the same businesses, but it is also possible that they could conceivably be

competitors in the marketplace. Also, because a parent company and a subsidiary are

separate entities, it is entirely possible for one of them to be involved in legal proceedings,

bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not.

The most common way that control of a subsidiary is achieved, is through the ownership of

shares in the subsidiary by the parent. These shares give the parent the necessary votes to

determine the composition of the board of the subsidiary, and so exercise control. This gives

rise to the common presumption that 50% plus one share is enough to create a subsidiary.

There are, however, other ways that control can come about, and the exact rules both as to

what control is needed, and how it is achieved, can be complex (see below). A subsidiary

may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent

and all its subsidiaries together are called a "group", although this term can also apply to

cooperating companies and their subsidiaries with varying degrees of shared ownership.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation.

For this reason, they differ from divisions, which are businesses fully integrated within the

main company, and not legally or otherwise distinct from it.

Subsidiaries are a common feature of business life, and most if not all major businesses

organize their operations in this way. Examples include holding companies such as

11

Berkshire Hathaway as in this listing of its subsidiaries, Time Warner, or Citigroup; as well

as more focused companies such as IBM, or Xerox Corporation. These, and others, organize

their businesses into national or functional subsidiaries, sometimes with multiple levels of

subsidiaries.

An operating subsidiary is a business term frequently used within the United States railroad

industry. In the case of a railroad, it refers to a company that is a subsidiary but operates

with its own identity, locomotives and rolling stock.

In contrast, a non-operating subsidiary would exist on paper only (i.e. stocks, bonds, articles

of incorporation) and would use the identity and rolling stock of the parent company

Types of Subsidiaries

Three types of Subsidiaries can be formed namely:

Public Limited Liability

Minimum Capital - Must be paid by the founders (minimum two members)

Shares - Can issue nominative or bearer shares

Management - Should have at least three directors. One director should be a

permanent resident of the country

Private Limited Liability

Minimum Capital - Must be paid by the founders

Shares - Shares need to be nominative. Bearer shares cannot be subscribed

Management - Managed by one or more managers

Co-operative Company with limited liability

12

Minimum Capital - Three partners are needed. One quarter of capital contribution

must be paid-in

Shares - Shares are nominative

Management - A co-operative company with limited liability and managed by one or

more managers.

13

Advantages and Problems of Subsidiary

Advantages

Considerable tax advantages and legal protections

Ability to offset profits and losses of one part of a business with another

Some countries allow subsidiaries to file tax returns on the profits obtained in that

country

Liabilities and credit claims are locked in that subsidiary and cannot be passed on to

the parent company

Allows for joint ventures with other companies with each owning a portion of the

new business operation

Problems of subsidiaries

Legal Risks: As long as the parent company holds its subsidiary accountable for the

expectations of its board of directors there is little risk for the parent to be found

liable for the wrong doings of the subsidiary. But, if the parent company exercises

excessive control for example has the same board of directors, use of common

letterhead, in such case the parent company and the subsidiary are treated as one and

the parent company is responsible for the subsidiaries debts etc.

Legal paperwork involved with creating a subsidiary can be lengthy and expensive

Control also becomes an issue when a subsidiary is partially owned by another

outside organization

14

There are a few vital points that act against the concept of setting up a wholly owned

subsidiary. Once can even consider these points as major problems of going ahead and

setting up a subsidiary.

The first and foremost point to be considered while setting up a subsidiary is the huge

amount of initial investment capital. The firm will have no other option but to bear all of the

establishment costs for setting up the subsidiary on foreign land and operational costs to

cover the global operations of this subsidiary.

The second and most dangerous problem is that there is the risk associated with becoming a

subsidiary. This risk is the risk of failure. The situation can go out of the hand, especially if a

foreign subsidiary rushes ahead recklessly without trying to get familiarized with the

cultural aspects and market swings in the host country. Often, it is seen that the subsidiary

comes down crashing in no time. The main cause behind the failure of a subsidiary on

foreign land is the fact that a subsidiary ends up being ignorant of the host country’s market

situation and fluctuating market trends. The subsidiaries often end up misjudging the host

country’s market situation and make erroneous decisions.

Especially when you consider the huge amount of capital to be invested, setting up a wholly

owned subsidiary seems to be all the more risky. Such a high amount of investment coupled

with a high degree of risk of failure often discourages people from opting for a wholly

owned subsidiary.

15

Parent Company - Subsidiary Relation

It is important that the subsidiary is recognized as an independent corporation managed by

the board of directors even though it was incorporated by the parent company. This does not

mean that the subsidiary is uncontrolled. The parent company has the legal authority to hold

the subsidiary accountable to meet the financial objectives.

For the Parent company to control the independent subsidiary it should be:

The sole shareholder

Include voting control provisions in subsidiary article

Prepare bylaws defining the authority of the officers, their term in the office and

removal

Prohibit bylaws amendment without shareholder's

approval

16

HOLDING COMPANY

HOLDING COMPANY

HOLDING COMPANY

HOLDING COMPANY

HOLD MORE THAN HALF OF EQUITY SHARE CAPITAL

HOLS THE HOLDING CO.

CONTROL COMPOSITION

OF BOARD

PRESENTATION 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.

a) A copy of the Balance Sheet of the subsidiary.

b) A copy of the Profit and Loss Account of the subsidiary.

c) A copy of the Report of the Board of Directors of the subsidiary.

d) A copy of the Auditors Report of subsidiary.

e) A statement indicating the extent of holding company’s interest in the subsidiary

at the end of the accounting year of the subsidiary.

f) 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.

17

AS. 21 – Consolidation of Financial statement

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

i.e. for year ending 31st March 2002. The A.S. 21 is applicable to all the enterprises that

prepare consolidated financial statement. It is mandatory for Listed companies and Banking

companies. 4 As per AS 21, The Consolidated financial statements would include:

i) Profit & Loss A/c

ii) Balance sheet

iii) Cash flow statement

iv) Notes of Accounts except typical notes.

v) Segment reporting AS 21 also desire various import terms, as well as

treatment and same while preparing consolidated financial statement. Consolidated

financial statements should be prepared for both domestic as well as foreign

subsidiaries.

Consolidated financial statements are financial statements that factor the holding company's

subsidiaries into its aggregated accounting figure. It is a representation of how the holding

company is doing as a group. The consolidated accounts should provide a true and fair view

of the financial and operating conditions of the group. Doing so typically requires a complex

set of eliminating and consolidating entries to work back from individual financial

statements to a group financial statement that is an accurate representation of operations.

18

The consolidated P   &   L includes the profits of subsidiaries and the company's share of

profits made by associates and joint ventures. If any subsidiaries are not fully owned then a

deduction will be made further down the P & L for the profits attributable to minority

interests.

The consolidated balance sheet similarly shows the amounts of assets and liabilities of the

company and all its subsidiaries. It also shows The value of holdings in associates and joint

ventures.

In contrast the company balance sheet and P & L only shows only shows the value of assets,

liabilities and profits of the company itself. The impact of subsidiaries, associates and joint

ventures is limited to the value of shares in them and dividends paid by them.

19

How to prepare consolidated financial statements

A consolidated profit and loss account is prepared so that shareholders and other

interested parties can see the results of the group for a period as though it were a single

entity. It will also show how much of the profit accrues to the shareholders of the

parent company and how much to the minority and how the directors will distribute

the profit accruing to the shareholders.

A parent company which is not a wholly-owned subsidiary must publish:

• Its own balance sheet

• A consolidated balance sheet

• its own profit and loss account

• A consolidated profit and loss account

However a parent company may, and many do, take advantage of a dispensation

offered by CA 85 - the ability not to publish its own profit and loss account if group

accounts have been prepared in line with CA 85 and its own profit is disclosed in a

note to the balance sheet.

20

Consolidated Balance Sheet

Under Indian Company Act, there is no need to prepare combined or consolidated final

accounts of holding and subsidiary company in the books of holding company but holding

company attaches the copy of balance sheet, one copy of profit and loss account and one

copy of audit report of subsidiary company with his final accounts. But for showing true

financial position, often holding company prepare consolidated balance sheet.

It is easy to understand that consolidated balance sheet is a balance sheet in which all the

assets and liabilities of holding company and subsidiary company are added with each other

but practically, it is tough to make consolidated balance sheet of holding and subsidiary

company.

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 line to line and combination of share capital,

reserves, and accumulated losses are not directly added in 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) Inter company owing.

21

5) Revaluation of fixed assets as on date of acquisition, depreciation, adjustment on

revaluation amount etc.

Steps for preparing consolidated balance Sheet of the holding company and its

subsidiary-company.

1st-Step

Add all the assets of subsidiary company with the assets of holding company. But

Investment of holding company in Subsidiary company will not shown in consolidated

balance sheet because, investment in subsidiary company will automatically adjust with the

amount of share capital of subsidiary company in holding company.

2nd-step

Add all the liabilities of subsidiary company with the liabilities of holding company. But

Share capital of subsidiary company in holding company will not shown in the consolidated

balance sheet in the books of holding company. Because, this share capital automatically

adjust with the amount of the investment of holding company in to subsidiary company .

3rd-Step

Calculate of Minority Interest

First of all we should know what minority interest is. Minority interest is the shareholder but

there is not holding company’s shareholder. So, when holding company shows consolidated

balance sheet, it is the duty of accountant to show minority interest in the liability side of

22

consolidated balance sheet.

We can calculate minority interest with following formula

Total share capital of Subsidiary company = XXXXX

Less Investment of Holding company in to subsidiary company = - XXXX

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

Add proportionate share of the subsidiary company‘s profit and

Reserves or increase in the value of assets + XXXX

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

Less proportionate share of the subsidiary company’s loss and decrease

In the value of total assets of company - XXXXX

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

Value of Minority Interest XXXXX

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

4th Step

Calculate cost of capital / Goodwill or Capital Reserve

If holding company purchases shares of subsidiary company at premium, then the value of

premium will be deemed as goodwill or cost of capital and shows as goodwill on the assets

side of consolidated balance sheet.

But if holding company purchases the shares of subsidiary company at discount, then this

value of discount will be capital reserve and show in the liability side of consolidated

balance sheet.

23

5th Step

Treatment of Pre – Acquisition of reserve and profit

Pre – acquisition profit and reserve of subsidiary company will be shown as capital reserve

in consolidated balance sheet but the value of minority interest’s profit or reserves deducts

from it and add in minority interest value.

Total profit before acquisition of subsidiary company = XXXX

Less share of minority interest - XXXX

Value of profit X minority interest’s value of shares in subsidiary company / total share

capital of subsidiary company.

_____________________________________________________

Pre – acquisition profit and reserve shown as capital reserve XXX

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

6th Step

Calculate post acquisition profits

After the date of purchasing the shares of subsidiary company , profit of subsidiary company

will also deem of holding company and it include in the profit of holding company and we

also separate the part of profit of minority interest and add in minority interest’s value and

shown in liability side .

7th Step

Elimination of common transactions

All common transaction between holding company and subsidiary company will not show in

24

the consolidated balance. There following common transaction:

1. Goods sold and goods purchase on credit and the value of debtor or creditor either

subsidiary company or holding company will not show in consolidated balance sheet

2. Value of bill payable or bill receivable of holding company on subsidiary company will

also not shown but if some bills value is discounted from third party then either of both

company’s payable value shown as liability in the consolidated balance sheet .

8th Step

Treatment of Unrealized profit

If subsidiary company sells the goods to holding company or holding company sells the

goods to subsidiary company at profit and if such goods will not sold in third party , then the

profit will not realized , so such unrealized profit will not credited to profit and loss

account . At this time a stock reserve account is opened and all amounts of unrealized profit

transfers to this account and this accounts total amount is deducted from closing stock of

consolidated balance sheet.

Suppose

Closing stock of H 50000

Closing stock of S 50000

________________________

100000

Less stock reserve

2000

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

25

98000

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

If subsidiary company has also other outsider’s shares then holding company makes reserve

up to his shares proportion.

9th Step

Treatment of Dividends

if holding company gets the dividends from subsidiary company, then this will divide into

two parts. If subsidiary company declare dividend out of capital profits, then this will add in

capital reserves in consolidated balance sheet. But, if subsidiary company has declared the

profit out of revenue gains, then this dividend will add in general profit and loss account and

will shown in the liability side of consolidated balance sheet.

26

Figure 1

27

CONSOLIDATED PROFIT AND LOSS ACCOUNT

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

prepared to show the operating activities of the companies comprising the groups. While

preparing the consolidated profit and loss account of the 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

adjustment have to be made.

1) Prepare profit and loss account in columnar form Amounts relating to inter company

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 23 accounted by holding and subsidiary company both and then

its should be eliminated.

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.

28

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.

29

LAYOUTS FOR CONSOLIDATED PROFIT AND LOSS

ACCOUNTS AND BALANCE SHEETS

The consolidated profit and loss account should be drawn up according to the following format:

CONSOLIDATED PROFIT AND LOSS ACCOUNT

1. Commission income

2. Net income from securities transactions and foreign exchange dealing

(a) Net income from securities transactions

(b) Net income from foreign exchange dealing

3. Income from equity investments

4. Interest income

5. Other operating income

6. NET INCOME FROM INVESTMENT SERVICES

7. Commission expenses

8. Interest expenses

9. Administrative expenses

(a) Staff costs

(aa) Salaries and fees

(ab) Staff-related costs

30

(aba) Pension costs

(abb) Other staff-related costs

(b) Other administrative expenses

10. Depreciation and write-downs on tangible and intangible assets

11. Other operating expenses

12. Loan and guarantee losses

13. Write-downs on securities held as financial fixed assets

14. Share of profit/loss of undertakings included in the consolidated accounts using the equity

method

15. NET OPERATING PROFIT (LOSS)

16. Extraordinary items

(a) Extraordinary income

(b) Extraordinary expenses

17. PROFIT (LOSS) BEFORE APPROPRIATIONS AND TAXES

18. Income taxes

(a) Taxes for the financial year and previous financial years

(b) Change in imputed taxes due

19. Other direct taxes

31

20. Share of profit/loss for the financial year attributable to minority interests

21. PROFIT (LOSS) FOR THE FINANCIAL YEAR

The consolidated balance sheet should be drawn up according to the following layout:

CONSOLIDATED BALANCE SHEET

ASSETS

1. Liquid assets

2. Claims on credit institutions

3. Claims on the public and public sector entities

4. Debt securities

(a) On public sector entities

(b) Other

5. Shares and participations

6. Participating interests

7. Shares and participations in group undertakings

8. Intangible assets

(b) Goodwill

(c) Other long-term expenditure

32

9. Tangible assets

(a) Real estate and shares and participations in real estate corporations

(b) Other tangible assets

10. Claims in respect of share, investment share capital and original fund issues

11. Own retained shares and participations

12. Other assets

13. Accrued income and prepayments

14. Imputed tax claims

LIABILITIES

A. LIABILITIES

1. Liabilities to credit institutions

2. Liabilities to the public and public sector entities

3. Debt securities issued to the public

(a) Bonds

(b) Other

4. Other liabilities

5. Accrued expenses and deferred income

33

6. Compulsory provisions

(a) Pension provisions

(b) Provisions for taxes

(c) Other provisions

7. Subordinated liabilities

8. Imputed taxes due

9. Negative consolidation difference

10. Minority interests

B. EQUITY CAPITAL

11. Share capital

12. Share premium account

13. Revaluation reserve

14. Other restricted reserves

(a) Reserve fund

(b) Reserves provided for by the articles of association

(c) Other reserves

15. Capital loans

16. Non-restricted reserves

34

(a) Reserve for own retained shares

(b) Other reserves

17. Profit (loss) brought forward

18. Profit (loss) for the financial year

OFF-BALANCE SHEET COMMITMENTS

1. Commitments given to a third party on behalf of a customer

(a) Guarantees and pledges

(b) Other

2. Irrevocable commitments given in favour of a customer

(a) Securities repurchase commitments

(b) Other

3. Undelivered securities transactions

35

Foreign Subsidiaries

Foreign subsidiaries companies final A/c should be consolidated along with other

subsidiary companies in the usual manner. The trial balance of the subsidiary or balance

sheet and profit and loss A/c of the foreign subsidiary is the first converted into home

currency. The rules of conversion are the same as for foreign branches which can be

summarized as under. a) Fixed Assets and fixed liabilities should be converted at the rate of

exchange prevailing as on date when such assets were purchased or such liabilities are

incurred or the payment was made if they are acquired or raised after acquisitions of shares.

b) Floating assets and liabilities should be converted at the rate of exchange prevailing on

the last day of the accounting year.

c) Revenue items or net profit for the year should converted at the average rate of exchange

ruling during the period under review.

d) Opening stock should be converted at the rate of exchange at the beginning of the year.

e) Share capital and Reserves of subsidiary company as on date of acquisition, should be

converted at the rate of exchange prevailing on date of acquisition.

f) Any remittances for purchases of goods by subsidiary company from holding company or

vice-versa should be converted at the actual rates prevailing on the date of purchase or date

of receipt of remittances.

g) Fixed assets / Fixed liabilities as on date of acquisition which are carried forward should

be converted at the rate of exchange prevailing on date of acquisition of shares; if rate on

date of acquisition on fixed assets not given.

36

After converting the various items of trial balance a new trial balance can be prepared,

difference if any in the new trial balance should be transferred to exchange fluctuation

account. Such difference may be carried and shown in the Balance sheet either as an asset or

as a liability depending on whether balance debit or credit, alternatively difference in

exchange can be transferred to profits & loss account

37

Illustration

The following are the summarized Balance Sheets of X Ltd. and Y Ltd. as at 31st December

2010.

1) X Ltd. acquired its interest in Y Ltd. on 1st January, 2010 when the balance to the

General Reserve Account of Y Ltd. was Rs. 1,80,000.

2) The Balance to the Profit & Loss Account of Y Ltd. as on 31st December, 2010 was

arrived at as under

38

3) Balance to the Profit and Loss Account of Y Ltd. as on 1-1- 2010 was after providing for

dividends on Preference shares and 10% dividends on Equity shares for the year ended 31st

December, 2009, these dividends were paid in cash by Y Ltd. in May 2010.

4) No entries have been made in the books of X Ltd. for debenture interest due or for proposed

dividends of Y Ltd. for the year ended 31-12-2010.

5) Mutual indebtedness of Rs. 24,000 is reflected in the balances shown in the Balance Sheets.

6) Y Ltd. in October 2010 issued fully paid up bonus shares in the ratio of one share for every four

shares held – by utilising its general reserve. This was not recorded in the books of both the

companies.

7) Dividend paid by Y Ltd. for 2009 was credited to profit & Loss A/c of X Ltd. instead of crediting

to investments in Subsidiary Company A/c. 8) X Ltd. acquired both the Equity shares and Preference

shares of Y Ltd. on 1st January, 2010. From the above information, you are required to prepare the

Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. as at 31st December, 2010. All

workings are to form part of your answer.

39

40

41

BIBLIOGRAPHY

1. http://archive.mu.ac.in/myweb_test/MCOM-%20Ac-%20Paper%20-

%20I.pdf

2. http://icaitv.com/live/icai210913/WebcastAccountingStandards21-23-

27V1p3.pdf

3. http://www.svtuition.org/2009/03/how-to-prepare-consolidated-

balance.html

4. http://www.svtuition.org/2009/03/what-is-holding-company.html

5. http://www.federalreserve.gov/reportforms/forms/FR_Y-

9C20130331_i.pdf

6. http://vinodkothari.com/wpcontent/uploads/2014/01/accounting-

standard-AS-21-consolidation.pdf

7. http://www.classifiedsonweb.com/backend/uploads/17.Accounts%20of

%20Holding%20Companies(Theory).pdf

42