PREPARE CONSOLIDATED BALANCE SHEET IN 9 STEPS CONSOLIDATED FINANCIAL STATEM ENTS Companies can combine and operate in groups by acquiring control over the resources of the other entities , through the mechanism of subsidiaries The external shareholders have to be made aware of a) Resource controlled by the parent b) Obligation of the group and c) the performance of the group with using such resources . This objective is possible only through consolidated financial statement The companies which are having subsidiaries, Joint ventures and associates shall have to prepare consolidated financial statement, it presents the financial position, operating results and statement of cash flow of a group of companies. Consolidation provides reporting as one single economic entity, the financial position and performance of a parent and its subsidiaries. The consolidated financial statement shall be Presented to the extent Possible , in the same format as that adopted by parent company. The Consolidated financial statement comprises of following : 1. Balance sheet 2. Statement of Profit and loss 3. Notes to accounts 4. Cash flow statement IMPORTANT TERMS SUBSIDIARY:- It is an enterprise that is controlled by another enterprise. PARENT:- It is an enterprise that has one or more subsidiaries. CONTROL:-Ownership , directly or indirectly through subsidiaries of more than one half of the voting power of an enterprise. Control of composition of the board of directors of an enterprise.MINORITY INTEREST: It is that Part of net results of operation and of the net assets of subsidiary, attributable to interest which owned by the external share holders (i.e. Which are not owned directly or indirectly through subsidiaries , by the parent. PARENT company UBSIDIARY FONDS PARENT CONTROL OF THE COMPANY COMPOSITION OF SHARE > ONE DIRECTORS HALF? Control important aspects: Itis possible that, though a company is not holding majority of voting Power, it may still able to exercise control, for reasons of other shareholders being inactive holders. Control may be direct or may be indirect . Consider a situation where A Itd has four subsidiaries, each of which have 25% Holding in H Itd . A Itd thus is capable of exercising indirect control . Despite there is no direct investment A Itd will include in its consolidation. Cons lation procedures Step 1 Date of acquisition Ascertain date of acquisition of parent in a subsidiary company Ex:-X Itd acquired 60% shares on 015 april 2015 in Y Itd, Here date of acquisition is 01% april 2015 Step 2Shareholding pattern Determine share holding pattern of the subsidiary company as on the date on which the consolidated balance sheet is to be Prepared. This pattern is used for apportionment of subsidiary profits. SL.NO | Particular No.of.Shares | Percentage(%) 1 Parent company | 60000 60 2 Subsidiary 40000 40 Company 3 Total(1+2) 100000 100 Step 3 Analysis of subsidiary reserves and surplus Analysis of reserves and surplus will include losses also. Subsidiary reserves and surplus are divided into pre acquisition and post-acquisition profits based on acquisition date. Ex:- A Itd acquired 60% shares at Rs.10 lakhs in B Itd as on 31-09-2015,The B Itd reserves as on 01-04-2014 is 100000 and on 31-03-2015 is 200000 profit for the year is 500000 Consolidated balance sheet is prepared on for the period 2014-15 Here the date of acquisition date is 01-09-2015 Pre-acquisition. period is before 01-09-2015 and post-acquisition period is after is 31-09-2015 Reserves ‘As on 31-03-2015 Rs.2,00,000 As on 01-04-2014 Rs.1,00,000 Profit transferred to reserves For the period 2014-15 is Rs.1,00,000/- (2,00,000-1,00,000) So, here pre-acquisition reserve is Rs.1,00,000 plus Rs.50000(Rs.1,00,000x6/12)= Rs.1,50,000/- (Capital profit) balance in reserve will be treated as revenue reserve Profit Profit for the year is Rs.5,00,000/-Pre-acquisition period is 6 months, so the profit will be apportioned between Pre-acquisition period and post-acquisition period. Pre-acquisition period profit is Rs.2,50,000/-(500000x6/12) Remaining period profit will be Rs.2,50,000/- Step 4 Apportionment of profits After analysis of profit and dividing into pre-acquisition and post-acquisition the same will be apportioned between parent company and subsidiary company, the pre-acquisition reserve and surplus will be treated as capital profit and the same will be deducted from cost of investment in Purchasing company, post-acquisition reserves and surplus will be merged in Parent company reserves and surplus. Sin Particular Pre- Post-acquisition profit ° acquisition Capital Profit | Revenue | Revenue Reserves | _ profits 1__| General Reserve 1,50,000 50,000 = 2 Other Reserves XXXK X00c = 3 | Profit and loss 2,50,000 = 2,50,000 4 | Less: Miscellaneous expenditure to the extent not written a = % off/unamortized 5 | Total 4,00,000 50,000 | 2,50,000 6 | Parent(60%) 2,40,000 30,000 | 1,50,000 7 | Minority 1,60,000 20,000 | 1,00,000 Interest(40%) | Step 5 Minority interest Compute Minority Interest [Sino | Particular Note Amount 1 Share capital Step-2 4,00,000 2 Capital profit Step-4 1,60,000 3 Revenue reserve _| Step-4 20,000 4 Revenue profits Step-4 1,00,000 5 Equity dividend _| =6 Preference share | Held by = L capital outsiders 7 Preference dividend =| 8 Less:-Stock Minority = Reserve share(upstream) 9 Total 6,800,000 Step 6 Determine cost of control [ Skno | Particular Amount | Amount a Cost of investment Amount invested- carrying 10,000,000 amount as per parent’s balance sheet NIL Less: Dividend received from pre-acquisition profits of 10,000,000 subsidiary Adjusted cost of Investment b | Value of investment- Aggregate of parent's share : Share capital 6,000,000 Pre-acquisition profits 2,400,000 Total 8,400,000 Cost of control- 1,600,000 (Goodwill/Capital reserve) Note:-Capital Reserve= If value of investment is more than the cost of investment Here in this case it is goodwill = 1,60,000/- Goodwill= If Cost of Investment is more than the value of investment. Step 7 Inter company transaction- Elimination/ Adjustment Inter company owing or debts Usual items like debtors/Creditors , Bills payable/Bills receivable, Loans given/loans taken, dividend payable/dividend receivable etc Adjustments for above items will lead to reduction in both companies Assets comprising goods or machinery purchased from other companyFor the inter company transaction we need to ascertain unrealised profits left over in the balance of stock or Instalment payable for machinery. In transactions between companies involving fixed assets, eliminate unrealized profit by applying downstream and upstream concepts DOWNSIRTAM TARE CORBIN DIARY COMPANY ee ursintam Particulars Downstream Upstream Transaction flow From Parent to | From Subsidiary to subsidiary parent Total of unrealized 100 percent 100 percent profit To be eliminated from asset ‘Adjustment Parents reserve 100 percent Respective share in subsidiary Minority Interest Nil Step 2 Step 8 Reserves for consolidated balance sheet Particulars | Capital Revenue Profit and ‘i reserve reserve loss Reserves as appearing in parents balance 100000 200000 400000 sheet Less: Dividend received from subsidiary company out of pre- (XXX), (XXX) acquisition profits "| transferred to investmentStep ‘Add:Parents share of post acquisition reserves and profits of subsidiary(step 4) 20000 100000 Less: Reserve for unrealized profits (xxx) Add: Capital Reserve (step 6) ee The net result is the value of reserves to be shown in consolidated balance sheet 100000 220000 500000 Preparation of consolidated Balance sheet Liabilities [ Share capital Only parent company _] Reserves Step-8 Minority Interest Step-5 Other liabilities ,loans, current liabilities and provisions Total of both companies Less: Inter company owing _| Assets Fixed assets Total of both companies And goodwill in step 6 Investment Total outside investment of Parent and subsidiary company Current assets,Loans and advances Total of both companies Less: Inter company owing Miscellaneous expenditure to the extent of not written off Only parent company Subsidiary amount will be net off during process of analysis of profits Step -4