Presentation on theme: "Holding Companies.

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Holding Companies

Meaning of Holding Companies

When a company acquires majority of shares (more than 50%) in the ownership or is in a
position to control the management of 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 by virtue of its shares ownership. The main objective behind the
holding companies is to promote combination movement so that competition may be eliminated,
also advantages of monopoly or near monopoly may be enjoyed and economies in management
and production may be secured.

DEFINITION OF holding company (Section 2(46) of Companies Act 2013)

As per Section 2(46) “holding company”, in relation to one or more other companies,
means a company of which such companies are subsidiary companies;

DEFINITION OF SUBSIDIARY COMPANY: (Section 2(87) of Companies

Act 2013)

As per Section 2(87) “subsidiary company” or “subsidiary”, in relation to any other

company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:
Sony Corporation
Another famous holding company is Sony Corporation, a multinational

conglomerate headquartered in Tokyo, Japan. A popular brand name today,

well heard of when it comes to electronics, music, the PlayStation and other

games, Sony was founded by Akio Morita and Masaru Ibuka in the year 1946.

It is now a public company with common stock listed on the Tokyo Stock

Exchange and New York Stock Exchange (NYSE) with the symbol SNE. In

FY2019 (year ended March 2019), the company reported firm-wide revenue of

8665.7 billion JPY and net income of about 419 billion JPY.

 Sony Corporation operates a wide array of businesses such as

entertainment, electronics, gaming, telecommunications, etc.

 The major subsidiaries under Sony Corporation are Sony Electronics Inc.,

Sony Global Manufacturing & Operations Corporation, Sony Interactive

Entertainment Inc., Sony Mobile Communications (formerly Ericsson),

Sony Music Entertainment (formerly CBS Group), Sony Network

Communications Inc., Sony Pictures Entertainment (including Columbia

Pictures as a division), etc.

Advantages of Holding Companies

Both companies can retain their identities as there is no need to liquidate themselves and lose
their identity.

Various income tax benefits can be enjoyed by forwarding their existing losses.

Subsidiary company can enjoy the advantage of existing goodwill.

Advantage of monopoly and near monopoly may be enjoyed.

Holding company device is best suited for promoting combination movement in business.

Profitability and the financial position of each company can be easily known as each company
has to prepare its own books of accounts.

Less investment is required to acquire the controlling interest in another company as compared to
another technique i.e. absorption and amalgamation.

Economies in production and management may be secured.

Disadvantage of Holding companies

These companies can manipulate the accounts for their fraudulent purposes.

Danger of oppression of minority shareholders.

Figures of inter company transactions may also be manipulated.

Holding companies enjoys all the benefits of monopoly but this is clearly a disadvantage from
social point.

Subsidiary company may be forced to appoint persons of the choice of holding company.

Holding company can unreasonably exploit the subsidiary company.

Capital profits (Pre acquisition reserve and profits)

If there exists some reserves and profits of the subsidiary company on the date of the acquisition
of shares of the subsidiary company, the outsider share of such reserves and profits is added to
the minority interest and the balance of such reserves and profits are capital profits of the holding
company and are shown as capital reserve in the Consolidated Balance Sheet.

Similarly, losses of the subsidiary company shown in the B/S on the date of purchase of shares
are divided into two parts i.e share of minority shareholders and share of the holding company.
Share of outsiders is deducted from the amount of minority interest and share of holding
company is added to the cost of control or g/w or reduced from capital profit.

Revenue (post acquisition profit)

Profit of the subsidiary company made after the date of the purchase of shares by the holding
company are treated as revenue profits. Holding company’s share of such profits is added to the
profits of the holding company and share of such profits belonging to the minority shareholders
is added to the amount of the minority interest.

Common transactions between the holding and the subsidiary company

In preparing consolidated Balance Sheet, common transaction appearing in both the balance
sheet of the holding company and the subsidiary company should be eliminated. Such
transactions may be:

Debtors and Creditors

Bills Receivable and Bills Payable

Loans

Debentures

Treatment of Bonus issue by Subsidiary Company

Treatment of issue of bonus shares by the subsidiary company will depend upon the source from
which the bonus shares are issued. Bonus shares may be issued out of
Pre acquisition profits or reserves or

Post acquisition profits or reserves of the subsidiary company.

I-Issue of bonus shares out of Pre acquisition profits

Such Issue will have no effect on the consolidated balance sheet because holding companies
share in pre acquisition profits is reduced on account of issue of bonus shares and on the other
hand paid up value of shares held be holding company increases. So , cost of Goodwill and
Minorities interest will remain the same as these were before the issue of bonus share.

II- Issue of bonus shares out of Post acquisition profits

Such issue will have effect on the consolidated balance sheet. The shares of holding company
shall reduce in revenue profits( post acquisition) and the paid up value of shares held by the
holding company will increase. Increased paid up value of shares held will reduce the cost of
control or Goodwill or increase the value of capital reserve.

Treatment of unrealised profits

Some time subsidiary company sold goods to holding company (or vice versa) at selling price
(i.e. after adding profit to its cost). If some part of these goods still lying with the purchasing
company in its stock, then profit included in such value of unsold stock is called as unrealised
profit. In such a case, reserve has to be created for such unrealised profit.

Such reserve shall be deducted out of the value of stock in consolidated profit.

Reserve is deducted out of the balance of profit and loss account of holding company.

Treatment of goodwill

Goodwill appearing in the Balance Sheet of subsidiary of company will be shown along with
goodwill (if any) of the holding company. In case there is capital reserve it will be adjusted in
capital reserve on consolidation.

Treatment of Contingent liability

Contingent liabilities are those liabilities which may or may not occur in future.
Examples:

Liability in respect of bills discounted not yet matured

Amount uncalled on partly paid up shares held as investment.

Areas of dividend on cummulative Preference shares.

Claims against the company not acknowledged as debt.

While preparing consolidated balance sheet the treatment of contingent liability depends on
whether it is towards outsiders or it is internal between holding and subsidiary company.

The external liability is shown by way of footnote in the consolidated balance sheet.

The internal contingent liability is not to be shown anywhere because it is treated as mutual
owing.

Treatment of fictitious assets

If fictitious assets (i.e. preliminary expenses, discount on issue of shares and debentures,
underwriting commission etc.) are given on the assets side of the B/S of subsidiary company then
these items must be deducted from the capital profits (or added to capital loss) before distributing
the same among the holding company and minority shareholders.

Treatment of Preference shares of subsidiary company held by the holding company

Three step treatment for, preference shares of subsidiary company held by the holding company
whether the same are held either wholly or partly.

The accounting treatment in the consolidated Balance Sheet is as follows:

1. The preference dividend accrued shall be deducted from the profits and the accrued preference
dividend is apportioned between minority shareholders and holding company in proportion to
holding.

The remaining profits are divided among equity shareholders (i.e. minority shareholders and
holding company) in accordance with the shares held by them.
If there are losses for the current year of subsidiary company then no preference dividend is
provided for.

2. Secondly while calculating the minority interest, the paid up value of preference shares held
by them shall be added to their shares.

3. Thirdly the excess amount paid by the holding company for acquiring preference shares over
the paid up value is treated as cost of control.

Consolidated balance sheet

While preparing consolidated balance sheet of Holding company and its subsidiary company,
three items are never shown.

Share capital (paid up) of subsidiary company (say S Ltd.)

Reserves and surplus of S Ltd.

Investment of Holding company (say H Ltd.) in S Ltd in the form of Equity shares or Preference
shares or Debentures.

Steps for preparing consolidated balance sheet

Step 1- Calculate ratio of equity shares held by H Ltd and outsiders (minority) in S Ltd as their
investment.

Step 2- Calculation of period prior to the date of acquisition of shares by H Ltd in S Ltd and
period post to the date of such acquisition

Step 3- Calculation of pre acquisition or capital profit of S Ltd

Balance of P&L a/c as in the beginning of the year xxx

G/R or other reserve as in the beginning of the year xxx

Current years profits for the pre acquisition period xxxxxx

Add: Increase in the value of fixed assets of S Ltd. Xxx

Less: Decrease in the value of fixed assets of S Ltd. Xxx

Less: Amount of bonus shares issued by S Ltd (if out of pre acquisition period profits) xxx

Less: Fictitious assets of S Ltd (now to be written off) xxx

Pre acquisition or capital profit or loss xxx

Step 4- Calculation of post acquisition or revenue profit of S Ltd.

Current years profits for post acquisition period xxx

Less: Amount of bonus issue by S Ltd. (if out of post acquisition profits) xxx

Add :Depreciation on decrease in value of fixed assets for post acquisition period xxx

Less: Depreciation on increase in value of fixed assets for post acquisition period xxx

Revenue Profits or Loss xxx

Step 5- Calculation of cost of control (or goodwill) or capital reserve

Amount invested by H Ltd in S Ltd (as per balance sheet of H Ltd)-In Equity shares xxx-In
Preference shares xxxxxx

Less-(i) Face value of equity shares held by H Ltd. In S Ltd. Xxx

(ii) Face Value of preference shares held by H Ltd in S Ltd xxx

(iii) Proportionate share of H Ltd in Capital profits of S ltd. Xxx

(iv) Proportionate shares of H Ltd in bonus issue (whether out of capital or revenue profit) xxx
xxx

Goodwill (if +ve) Capital Reserve (if –ve) xxx

Add: Goodwill already shown in the balance sheet of H Ltd & S Ltd. ___

Net goodwill or capital reserve xxx

Step 6- Calculation of minority (or outsiders) interest

Face value of equity shares in S Ltd held by outsiders xxx

Face value of preference shares in S Ltd held by outsiders xxx

Dividend on preference shares held by outsiders xxx

Proportionate share of outsiders in capital profits xxx

Proportionate share of outsiders in revenue profits xxx

Proportionate share of outsiders in bonus issue xxx

Value of minority interest xxx

Step 7- Calculation of balance of profit and loss account of H Ltd

Balance of P&L a/c of H Ltd as per its balance sheet xxx

Add: Proportionate share of H Ltd in revenue profits xxx

Less: Unrealised profits on unsold stock xxx

Balance of profit and loss a/c of H Ltd xxx