UNIT-III ACCOUNTING FOR HOLDING COMPANIES

Accounting for Holding Company

A Holding Company is a Parent Company that holds a majority interest in several companies. For
instance, if the shares of a limited or a private company are held by another company, then such a
company is called a ‘Holding Company’. The relationship created is that of a subsidiary and holding
company. In most cases, the subsidiary companies operate independently, except in the case of the
ownership.

Holding company is a company that does not operate on its own but control over
other companies. The holding company has controlling interest in other companies
which are known as the subsidiaries.
While holidng company is also known as the parent company. Even they have the
power to influence, the holding company will not interfere with each subsidiary’s
daily operation. It will oversee the internal policy and management decisions. It
simply appoint the top management or advisory team to manage each company if
necessary.

Purpose of Setting up a Holding Company

 Dividing different business ventures: Multiple business lines of a company
differently, and these can be divided in a manner to have an independent legal
identity. Therefore the subsidiary can independently function like any other normal
company, hold assets and trade under its name.
 Dividing Tax Burden: With multiple subsidiaries, the tax liability of the parent
company is divided and distributed; this reduces the burden on a single company.
 Regulatory Mandates: As Indian keeps promoting FDI policies and ease of doing
business, we see a lot of foreign companies coming in. According to certain policy
mandates, the businesses would have to operate through separate companies,
rather than opening branch offices.
 Business Mergers and Acquisitions: The result of merger and acquisition ventures
result in a new subsidiary company being formed.
Holding Company Feature
 The aim of a holding company is to manage the other companies
 It does not produce goods or services in daily operation.
 It is a centralized control of all entity include subsidiary, associate, and
partnership

Advantage of Holding Company

 Good control: Holding company is a controlling company that
oversees other companies that it has a controlling interest. It become a
centralize for controlling purpose and check each company
performance.
 Low controlling cost: the holding company will be able to control
multiple entities at a lower cost. One holding company can control
many subsidiaries, associates, and assets. It will be high cost if we set
up one company to control one entity.
 Independent: Many entities are under the holding company and they
work independently. If one of them has any legal issue, it will not
impact the group or parent company.
 Liability Protection: The company can protect each subsidiary’s
liability by separate them into independent entities. When any
subsidiary bankrupt, it will not impact the other subsidiaries or holding
company. If all operations are placed under one company, it will impact
to all business.
 Lower cost of debt: A holing company or any subsidiary that has
strong credit rating will be able to obtain loan at a lower rate. The
company will obtain the loan at lower cost and distribute to the start
up a subsidiary.
 Tax: Holding company will prepare consolidate tax return of all entities
below it. So when one subsidiary loses, it will be offset with the other
and reduce the taxable amount. Moreover, it can use the transfer
pricing to reduce the total tax amount in the group.
Disadvantage of Holding Company
 Complexity: the structure of the holding company is hard to
structure and control. It controls sudsidiray with different control
percentages, associates, and assets. The method of controlling
each entity is not the same which is so confucsing to manage.
 Management issue: For sure, the management of the holding
company will not be the expert in all subsidiaries. So it will be
hard for them to oversee their policy and performance. Moreover,
the management needs to deal with the subsidiary’s minority
interest which leads to conflict between groups.
 High cost for each entity: each entity needs to follow the
procedures from holding company which may not be applicable
for all of them. They have to comply as it allows the holding to
consolidate and compare across the group.