UNIT 5: HOLDING COMPANY ACCOUNTS

Meaning of a Holding Company:

Holding company is the company which has acquired or holds (directly/indirectly) more than
50% of the nominal value of the equity shares of another company, and thereby, secures a
controlling interest in such a company.
According to Sec 4 of the Companies Act of 1956 a holding company is defined as “a
company shall be deemed to be a holding company of another if and only if that the other is its
subsidiary”.
A holding company is one that holds either the whole of the share capital or a majority of the
shares in one or more companies so as to have a controlling interest in such companies.
Meaning of a Subsidiary Company:
Subsidiary company is the company which is controlled by the holding company, because of
its holding interest in it or subsidiary company is the company which has sold more than 50%
of its nominal value of its equity shares to another company or is a subsidiary of another
subsidiary company.
Definition:
According to Sec 4 of the Company Act 1956 “a company should be deemed to be
a subsidiary company of another if and only if:
a) That other company controls the composition of the board of directors.
b) That other company holds more than half of the nominal value of its equity share
capital.
c) That the company is subsidiary of any company which is a subsidiary of other
company.
Accounts to be prepared:
Under Section 212 of the Companies Act, 1956, the following must be attached to the
Balance Sheet of a Holding Company:
a) A copy of the Balance Sheet of the subsidiary/subsidiaries,
b) A copy of the Profit & Loss Account.
c) A copy of the report of its Board of Directors,
d) A copy of the report of the Auditors
e) A Statement of the Holding Company’s interest in the Subsidiary and the profits
of the subsidiary as far as they concern the holding company.
Consolidated Balance Sheet:
Consolidated balance sheet is the balance sheet, which shows the values of assets & liabilities
of holding company along with the values of assets & liabilities of subsidiary company, after
adjusting inter-company Owings, investments, & separately showing the cost of control &
minority interest.

Procedures/Steps to be followed for preparing the Consolidated Balance Sheet.

The procedures to be followed for preparing the consolidated balance sheet are as follows:
 Step 1- Calculation of Ratio of Holdings:
Ratio of holdings indicates the percentage of shares held by the holding company
and the subsidiary company. The ratio of holdings forms the basis for the distribution of
capital profits and revenue profits of the subsidiary company.
Ratio of Holdings:
Number of shares acquired by the : Number of shares remaining with the Subsidiary
Holding Company Company
Step 2 – Calculation of Capital Profits or Pre-acquisition Profits
Capital profits refer to the accumulated profits in the subsidiary company up to the
date of purchase. The capital profits will be shared between the holding company and the
subsidiary company in the ratio of holdings.
Particulars Amount (Rs)

Reserves in the subsidiary co., as on the date of acquisition of shares XXX

Profits in the subsidiary co., as on the date of acquisition of shares XXX

Increase in the value of Assets (profit on revaluation of assets) XXX

XXX

Less: Losses in the subsidiary co., as on the date of acquisition of shares XXX

Decrease in the value of Assets (loss on revaluation of assets) XXX

Capital Profits / Pre-acquisition Profits XXX

Step 3 Calculation of Revenue Profits or Post-acquisition Profits :

Revenue profits refer to the profits and reserves earned by the subsidiary company
from the date of purchase to the end of the first accounting period. The revenue profits will be
shared between the holding company and the subsidiary company in the ratio of holdings.
Particulars Amount (Rs)

Reserves created in the subsidiary co., from the date of acquisition of

shares to the date of first accounting year after acquisition
XXX
Profits earned by the subsidiary co., ., from the date of acquisition of
shares to the date of first accounting year after acquisition

Excess depreciation charged on Assets, if any. XXX

XXX

XXX

Less: Losses incurred in the subsidiary co., ., from the date of acquisition XXX

of shares to the date of first accounting year after acquisition XXX

 Under depreciation charged on Assets, if any.

Revenue Profits / Post-acquisition Profits XXX

Step 4: Calculation of cost of control i.e., goodwill or capital reserve :

Cost of control refers to the investments made by the holding company for acquiring
the shares of the subsidiary company and the benefit received for the investment made. Cost
of Control may be Goodwill or Capital Reserve
Particulars Amount Amount(Rs)

Cost of acquisition of shares in subsidiary co., XX

Cost of acquisition of debentures in subsidiary co., XX

Add: Holding Co.’s share of capital loss if any (Step 2) XX XXX

Less: a) Total face value of the shares acquired or purchased XX

b) Holding Co.’s share of capital profit, if any (Step 2) XX XX

(+ Goodwill) ( - Capital Reserve) XXX

Step 5 : Calculation of Minority Interest :

Minority interest refers to the total value of shares remaining with the subsidiary company and
the share of capital and revenue profits of subsidiary shareholders
Particulars Amount Amount(Rs)

Total face value of the shares remaining with subsidiary co., XX

Add: a) Subsidiary co.’s share of capital profit (Step 2) XX

b) Subsidiary co.’s share of revenue profit ( Step 3) XX XXX

Less: a) Subsidiary co.’s share of capital loss, if any (Step 2) XX

b) Subsidiary co.’s share of revenue loss, if any ( Step 3) XX XX

(+ Goodwill) ( - Capital Reserve) XXX

UNREALISED PROFITS:
Unrealized profits refers to the profits which has not been realized (received or earned),
unrealized profits arises on account of the goods sold by either the holding company or the
subsidiary company for each other and such goods remains in the stock at the end of the year.
Accounting Treatment:
Unrealized profits calculated should be deducted from the combined stocks in the consolidated
balance sheet and from the profits of the holding company in the consolidated balance sheet.

Illustration 1
‘H’Ltd acquired 8,000 shares of Rs.10 each in ‘S’Ltd. On 31/12/2012 the summarized
Balance Sheet of ‘H’Ltd and ‘S’Ltd were as follows:-
Liabilities ‘H’Ltd ‘S’Ltd Assets ‘H’Ltd ‘S’Ltd

Share capital Machinery 60,000 45,000

Shares of Rs.10 Furniture 2,000 4,000

each
2,00,000 1,00,000 Investments
Reserves
10,000 15,000 Shares in ‘S’Ltd 98,000 ---
Profit & Loss A/c
5,000 4,500 Stock 42,000 65,000
Bank Loan
-- 12,000 Debtors 18,000 27,000
Creditors
40,000 20,000 Bills Receivable 1,000 1,500
Bills Payable
2,000 1,000 Cash 36,000 10,000

2,57,000 1,52,500 2,57,000 1,52,500

On the date of acquisition of Shares by ‘H’Ltd, the ‘S’Ltd had undistributed profits Rs.1,500
and Reserves amounted to Rs. 5,000.
Prepare the Consolidated Balance Sheet.

Illustration 2:
From the following information you are required to prepare consolidated balance sheet of
‘P’ Company Ltd and its subsidiary ‘Q’ Company Ltd as on 31/12/2014.
Liabilities ‘P’ Ltd ‘Q’ Ltd Assets ‘P’ Ltd ‘Q’ Ltd

Share capital Goodwill 2,00,000 50,000

Shares of Rs.100 Plant 5,00,000 2,50,000

each
8,00,000 4,00,000 Buildings 2,00,000 1,00,000
Capital reserve
1,50,000 --- Investments
General reserve
1,40,000 1,00,000
 Profit & Loss A/c 2,60,000 50,000 3,000 Shares in ‘Q’ 3,60,000 ----
Ltd
Loans 2,00,000 1,00,000 ----- 60,000
Loans & Advances
Creditors 1,50,000 60,000 1,20,000 90,000
Stock
Bills Payable 1,00,000 40,000 1,50,000 1,00,000
Debtors
1,00,000 50,000
Bills Receivable
1,70,000 50,000
Bank

18,00,000 7,50,000 18,00,000 7,50,000

Additional Information
1. Bills Payable of ‘Q’ Ltd includes Rs.30,000 due to ‘P’ Ltd.
2. Sundry creditors of ‘P’ Ltd includes Rs.50,000 due to ‘Q’ Ltd.
3. On the date of acquisition of shares (1/1/2014) ‘Q’ Ltd’s Balance Sheet showed a
General reserve of Rs.40,000 and Profit & Loss A/c of Rs.20,000.

Illustration 3:
From the Balance Sheets and information given below prepare Consolidated Balance Sheet
as on 31st March 2012.
Liabilities ‘H’ Ltd ‘S’ Ltd Assets ‘H’ Ltd ‘S’ Ltd

Share capital Fixed assets 4,00,000 60,000

Shares of Rs.10 Stock 3,00,000 1,20,000

each
5,00,000 1,00,000 Debtors 75,000 85,000
Reserves
60,000 30,000 Bills receivable 20,000 ----
Profit & Loss A/c
2,00,000 60,000 Investments
Bills Payable
--- 15,000 7,500 Shares in
Creditors ‘S’ Ltd.
1,10,000 60,000 75,000 ----

8,70,000 2,65,000 8,70,000 2,65,000

Additional information

1. The bills accepted by ‘S’ Ltd are all in favour of ‘H’ Ltd.
2. The stock of ‘H’ Ltd includes Rs.25,000 bought from ‘S’ Ltd at a profit to the latter at
20% on sales.
All the profits of ‘S’ Ltd has been earned since the shares were acquired by ‘H’ Ltd but there
was already reserve of Rs.30,000 at that date

Illustration 4
From the following information you are required to prepare a Consolidated Balance Sheet
of ‘K’ Ltd and its subsidiary ‘B’ Ltd as on 31/12/2012.
Liabilities ‘K’ Ltd ‘B’ Ltd Assets ‘K’ Ltd ‘B’ Ltd

Share capital Goodwill 1,00,000 ----

Shares of Rs.10 Plant & Machinery 2,00,000 1,20,000

each
5,00,000 2,00,000 Buildings 2,00,000 1,30,000
Surplus
1,50,000 40,000 Investment(16,000
Unsecured loans Shares of ‘B’ Ltd)
--- 40,000 2,00,000 ----
Creditors Government
1,00,000 60,000 securities
Bills payable
50,000 20,000 Stock ---- 50,000
General reserve
2,00,000 60,000 Debtors 80,000 50,000
Secured loans
--- 80,000 Bills receivable 1,00,000 40,000

Bank 50,000 ---

Cash 20,000 80,000

50,000 30,000

10,00,000 5,00,000 10,00,000 5,00,000

Additional Information
1. Bills Payable of ‘B’ Ltd includes Rs.10,000 due to ‘K’ Ltd of which were
discounted bills worth Rs.5,000 were with its banker.
2. Sundry Creditors of ‘K’ Ltd includes Rs.20,000 due to ‘B’ Ltd.
3. The closing stock of ‘K’ Ltd includes stock worth Rs.60,000 supplied by ‘B’
Ltd which had invoiced to ‘K’ Ltd at cost plus 20% profit.
4. On the date of purchase (1/1/12) of Shares of ‘B’ Ltd by ‘K’ Ltd, the Balance
Sheet of ‘B’ Ltd showed General Reserve of Rs.20,000 and surplus of
Rs.10,000.
Illustration 5:

From the following Balance Sheets of X Ltd and its Subsidiary Y Ltd prepare the Consolidated
Balance Sheet as on 31/12/2014.

Liabilities ‘X’ Ltd ‘Y’ Ltd Assets ‘X’ Ltd ‘Y’ Ltd

Share capital Goodwill ---- 5,000

Shares of Rs.5 each Buildings 50,000 17,500

General reserves 2,50,000 50,000 Machinery 1,50,000 30,000

P&L A/c 25,000 10,000 Shares in Y Ltd 42,500 ---

Creditors 12,500 16,000 Stock 50,000 15,000

Bills payable 22,500 6,000 Debtors 30,000 6,000

15,000 3,000 Bills Receivable --- 9,000

Cash in hand 2,500 2,500

3,25,000 85,000 3,25,000 85,000

The X Ltd purchased 7,500 shares of Y Ltd on 1/7/2014. The balance to the General reserves and
P&L A/c of Y Ltd stood at Rs.6,000 and Rs.4,000 respectively on 1/1/2014. The Bills Receivable of
Y Ltd Rs.9,000 is accepted by X Ltd. the debtors of Y Ltd Rs.2000 due from X Ltd.