You are on page 1of 62

A form of Corporate Restructuring

A company controlling partial or complete interest in another company. Corporation that owns enough voting stock in another corporation to influence its board of directors and therefore to control its policies and management. (Atleast 80% of voting stock to gain the benefits of tax consolidation which include taxfree dividends )

Ability to control sizeable operations with fractional ownership and small investment. Take risks through subsidiaries with liability limited to the subsidiary corporation. Reduces the risk of parent company.

Partial multiple taxation when less than 80% of a subsidiary is owned. Special state and local taxes. The risk of forced divestiture.

It is effective from 1.4.2001,mandatory in respect of all enterprises which present consolidated financial statement. For this, the financial statements of the parent and its subsidiaries should be combined on line-by-line basis by adding together like items of assets, liabilities income and expenses.

The following steps should be taken: The cost to the parent of each subsidiary at the date on which the investment in each subsidiary is made, should be eliminated. Any excess of cost to the parent of its investment in a subsidiary should be described as goodwill to be recognized as an asset in the consolidated financial statement. When the cost to the parent of investment in a subsidiary is less than the parents proportion of equity of the subsidiary, the difference should be treated as a capital reserve in the consolidated financial statement.

Minority interest in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group. The parents portion of equity in a subsidiary is determined on the basis of the information contained in the financial statements of the subsidiaries as on the date of investment.

If the financial statement of the subsidiary are not available, financial statement for the subsidiaries for the immediately preceding period are used as the basis for consolidation. If an enterprise make two or more investments in another enterprise at different dates and eventually obtains the control of the enterprise, the consolidated financial statement are presented only from the date on which holding subsidiary relationship comes in existence.

The amount of equity attributed to minorities at the date on which investment in a subsidiary is made. The minorities share of movements in equity since the date the parent subsidiary relationship came into existence.

control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future. It operates under severe long term restrictions which significantly impair its ability to transfer funds to the parent.

When the holding company acquires more than half but less than all the shares of the subsidiary company, those shareholders who have minority shares are referred to as minority shareholders. The interest of the minority shareholders must be accounted for separately in the consolidated balance sheet.

A Minority interest is the proportion of the subsidiary companys net assets/shareholders fund which belong to the minority shareholders. The value of the Minority interest is the portion of the share capital and reserves at the date when the holding company acquires its controlling interest and the share of income after acquisition.

A Ltd. Acquired 80 percent of the shares of B Ltd. For Rs. 40,000. The balance sheet of the two companies are as under:
Liabilities A Ltd. B Ltd. Assets
Fixed Assets Investment 4,000 Shares in B Ltd. At par. Current assets 3,00,000 70,000

A Ltd.

B Ltd.

Share Capital(Rs. 10) Long term liability Current liabilities

2,00,000 50,000 40,000 ------60,000 20,000

1,90,000 40,000





3,00,000 70,000

Prepare a consolidated balance sheet.

Since A Ltd. Holds 80 % of the shares of B Ltd., 20 % of the shares of B Ltd. belongs to minority shareholders, i.e. minority interest is 20 %.

Net assets of B Ltd.: 70,000 20,000 = 50,000 80 % of 50,000 i.e. 40,000 belongs to the shareholders of A Ltd. 20 % of 50,000 i.e. 10,000 belongs to minority shareholders. This is the minority interest.

The consolidated balance sheet of A Ltd. And its subsidiary B Ltd.

Liabilities Amount 2,00,000 Assets Fixed Assets: (1,90,000 + 40,000) Current assets: (70,000 + 30,000) Amount 2,30,000

Share capital( Rs. 10)

Long term liability

Current liabilities Minority interest

80,000 10,000 1,00,000



Minority interest is not the liability but capital of the group which does not belong to the shareholders of the holding company. Minority interest is always calculated at the date of the consolidated balance sheet not when the holding company takes the control.

When the value of Investment in Subsidiary in the holding companys balance sheet is more than the book value of the net assets acquired, the difference represents Goodwill on Consolidation.

H ltd. Acquired 80% of the shares of S ltd. For Rs.48,000. the balance sheet of two co. are as under:Liabilities Share capital (Rs.10) H ltd. 2,00,000 S ltd. 50,000 Assets Fixed assets H ltd. 1,90,000 S ltd. 40,000

Long term liability


Investment 4000 share@10 each Current Assets


Current liabilities









Liabilities Share capital (Rs.10)

Amount 2,00,000

Assets Goodwill

Amount 8,000

Long term liability


Fixed assets (1,90,000+40,000)

Current Assets (62,000+30,000)


Current liabilities Minority interest (20% of 50,000)

80,000 10,000




When Holding company purchases the shares of subsidiary company at any time during the financial year, then the year is divided into two parts Pre-acquisition period Post-acquisition period

General Reserve Capital Reserve Profit for the current year

The portion of these, for the period prior to purchase is treated as capital profit for the Holding company

Dividend paid out of pre-acquisition profit:

The amount of dividend paid by subsidiary company out of pre-acquisition profit must be appropriated from last years profit. Holding companys share of the same must be deducted from the amount paid for acquisition of shares in order to ascertain goodwill/capital reserve. Holding companys share of the same should also be deducted from consolidated profit.

Interim dividend paid by subsidiary company:

The amount of interim dividend paid by subsidiary company must be added with current profit. Minorities share of the same will be deducted from the minorities interest. Holding companies share should also be deducted from consolidated profit.

Proposed dividend already shown in the B/S of the subsidiary company:

The amount of proposed dividend must be added with current profits. Minoritys share should be deducted from minoritys interest, which will appear again separately as a liability.

Proposed dividend recommended by the subsidiary company but not yet given effect in the accounts:
Simply minoritys share of the proposed dividend should be deducted from minoritys interest, which will appear again separately as a liability in the consolidated B/S.

Preference share dividend due:

The amount of preference share dividend, which is due, must be appropriated from the current profits before the balance is distributed to the equity shareholders.

Minoritys share of this dividend, if any, should be added with minoritys interest.
Holding companys share is added with consolidated profit.

Share premium:
When holding company purchases the share of subsidiary company at a premium then this premium is shown as goodwill in the asset side.

Calculation of Capital reserve:

Add: Book value of acquired shares of subsidiary company. Share of holding company in the reserve of subsidiary company for the pre-acquisition period. Share of holding company in the funds of subsidiary company for the pre-acquisition period. Share of holding company in the profit of subsidiary company for the pre-acquisition period. Less: Purchase price of shares of holding company.

Contingent liability is the liability which may or may not happen. It is customary to show contingent liabilities as a foot note to the balance sheet.

CONTINGENT LIABILITY is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognized because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of the obligation cannot be made.

Contingent liability may be of two types: a) External contingent liability:-this is on account of a transaction between the company & the third party.

Internal contingent liability:-this is on account of a transaction between the companies of the same group.

While preparing the consolidated balance sheet the external contingent liabilities are shown as a footnote to the balance sheet while the internal contingent liabilities are eliminated from the footnote since they appear as actual liabilities in the consolidated balance sheet.

If there is any change in the valuation of assets at the time of acquisition of the subsidiary company by the holding company, the effect of profit or loss on revaluation should be reflected in the Consolidated Balance Sheet If there is a profit, it will be apportioned and will be used in calculation of goodwill / capital reserve and minority interest The revaluation profit will be taken to Investment in Subsidiary Company Profit will reduce the cost of control on value of goodwill or capital reserve. If the revaluation results in a loss, the cost of control on value of goodwill or capital reserve will be increased.

Effect on Depreciation

If the revaluation results in an increase

If depreciation has already been charged, seems to be undercharged and the amount of extra depreciation is treated as revenue loss This should be deducted from the P/L account of the subsidiary

If there is a downward revaluation

If depreciation has already been charged, seems to be overcharged and the amount of extra depreciation should be written off and considered as revenue profit. This should be added with the P/L account of the subsidiary

The following are the Balance Sheets of R Ltd & S Ltd. As on 31.12.2006: (figures in Rs.)

Equity Share of Rs 10 each Profit & Loss A/C External Liabilities

R Ltd.
4,00,000 50,000

S Ltd.
1,00,000 20,000


R Ltd.

S Ltd.



2,50,000 Equipment Investment : 9,000 Equity Shares in S Ltd 1,40,000 On 1.1 2006 Current Assets 8,10,000






On January 1, 2006, Profit & Loss A/C of S Ltd showed a credit balance of Rs 8,000and Equipment of S Ltd was revalued by R Ltd at 20% above its book value of Rs 1,00,000 ( but no such adjustment was effected in the books of S Ltd). Prepare the balance sheet as at 31.12.2006

Share Capital: Equity Shares of Rs 10 each Reserves & Surplus: Profit & Loss A/c Current Liabilities: External Liabilities Minority Interest


Assets Fixed Assets: Goodwill Equipment Current Assets


4,00,000 59,900 12,30,000 13,900

24,800 3,64,000 13,15,000




Degree of Control = 9,000 Shares / 10,000 Shares = 9/10th; Minority Interest = 1/10 R ltd 8,000 20,000 ----------28,000 20,000 8,000 1,000 ---------11,000 S ltd

2) Capital Profit Pre-acquisition profit Revaluation Profit (1,20,000 1,00,000) 3) Post-acquisition Profit Profit as per Balance Sheet - Pre-acquisition profit - Depreciation





R ltd
4) Share Capital - Minority Interest ( 1/10) Adjusted in Calculation of Goodwill/ capital Reserves 1,00,000 10,000 -------------90,000 90,000

S ltd

Minority Interest
Calculation of Goodwill/Capital Reserve Cost of Investments - Capital Profit - Face Value of Shares held



25,200 90,000

1,15,200 -------------24,800


Particular R Ltd S Ltd

Equipment 2,50,000 95,000 3,45,000 20,000 3,65,000 1,000


Current Assets 8,10,000 5,05,000

External Profit & Liabilities loss 7,50,000 4,80,000 50,000 9,900

+ Revaluation Profit - Depreciation

13,15,000 12,30,000


Depreciation :
5000/1,00,000 * 100 = 5%, 1,20,000* 5% = 6,000 Difference = 6,000 5,000 = 1,000

Profit earned by the subsidiary company before the holding company acquires its control.

To be considered for calculation of goodwill or capital reserve It is split between cost of control and minority interest

Profits earned by the subsidiary company after the holding company acquire its control.

Not to be considered in the calculation of goodwill or capital reserve Is apportioned between holding company and minority shareholders.

At the time of consolidation, inter-company debts and acceptances which are part of the same group, are to be cancelled out. Bills discounted with the bank will appear as a contingent liability in the consolidated balance sheet as a footnote at their face value.

At the time of preparing consolidated balance sheet, loans and advances recorded in the current account are to be cancelled out. Differences in the two accounts usually caused by goods-in-transit or cash-in-transit is shown in the consolidated balance sheet as one of the assets.


H Ltd. S Ltd. Assets


S Ltd.

Share capital(Rs.10 each) P/L a/c General reserve Creditors: External H ltd.

50000 40000 Fixed assets Debtors external 10000 6000 S Ltd. 12000 4000 Cash at bank Shares in S ltd. 11000 5000 (3000 shares) 2900 Goods in transit Stock Other investments
83000 57900

20000 30000
9000 5000 3000 5500 1900 32000 600 4000 8900

9000 12000


83000 57900

The credit balance of P/L A/c of S Ltd. at the date H Ltd. bought its shares was Rs. 2000 and general reserve stood at nil.on 31st dec01,there were goods-in-transit from HlLtd to S Ltd. Rs.600 and cash in transit Rs.100 from S Ltd. To H Ltd.

Prepare the consolidated balance sheet as at 31st dec01.

Working Notes: 1) Degree of control 3000/4000=3/4th Minority=1/4th

Capital profit Revenue profit Profit as per B/S 6000 Less:capital profit (2000) Post-acquisition G/R Share capital


H Ltd.s Minority share interest

1500 500

4000 3000 4000 3000 40000 30000

1000 1000 10000


Calculation of Goodwill: Cost of investment Less: capital profit Less:face value of shares held Goodwill

32000 1500 30000 500

Consolidated balance sheet of H Ltd. and S Ltd. as on 31st Dec01 Liabilities

Equity share capital (Rs.10 each) General reserve(12000+3000) P/L A/C(10000+3000) Creditors(11000+5000) Minority interest


Goodwill Fixed assets(20000+30000) Investments(8900+12000) Stock in transit Stock (4000+9000) Debtors (9000+5000) Cash in transit Cash at bank (5500+1900)

500 50000 20900 600 13000 14000 100 7400

15000 13000 16000 12500




CONSOLODATED P&L A/c is prepared to show the PROFIT of the group so that the shareholders maybe able to know the profits of the company in which they have made the investments

Transfer of goods within the group should be eliminated, so consolidated p&l a/c eliminated purchases and sales within the group Common income and expenses are eliminated from consolidated p&l a/c Reserve for unrealised profits on unsold goods sold by the subs. to the holding co. (or vice versa) is created by debit to consolidated p&l a/c and credit to the stock reserve a/c
Consolidated P&L A/c.Dr. To stock Reserve a/c

Interest on debentures and dividends received by the holding co. from the subs. Co.(or vice versa) is eliminated from the consolidated p&l a/c No adjustment is required for tax on dividends or on interest on debentures because the payment of tax is to be made to the outsiders. For the share of profit of holding Co. in the preacquisition profit of subs. Co. then the record is made as : Consolidated p&l a/c.Dr. To capital reserve a/c

Share of profit of minority shareholders in the profit of subs. Co. is recorded as : Consolidated p&l a/c .Dr. To minority shareholders a/c Holding Co.s share of the profit set aside for redemption of preference shares is debited to consolidated p&l a/c and credited to capital redemption reserve a/c.

Consolidated Trading and P&L a/c of H.LTD and its subsidiary S.LTD For the year ending ..
PARTICULARS H. ltd S. ltd Adjust Total PARTICULARS H. ltd S. ltd Adjust Total

To purchase To cost of goods sold To gross profit To general expenses To dep. To net profit c/d To minority int. To stock res. To capital res. To bal c/d

By sales

By g/p b/d By dividend recd

By bal b/d


R Ltd.

S Ltd.

Assets Fixed Assets

R Ltd. S Ltd. 500000

Share Capital: 240000 Equity Shares of Rs 10 each fully paid General Reserve ----P&L Ac. 12% Debentures Current Liabilities and Provisions

400000 50000 30000 200000 320000

Investments in 150000 15000 E. Shares in 40000 SLtd. On 1.1.2001 200000 25000 Current Assets --(including Rs10000 stock-in-trade 285000 purchased from RLtd)


Particulars P&LAc. R Ltd. S Ltd. Less :Unrealised Profit on Stock

Fixed Assets C.Assets C.Liabilities G.Reserve

500000 240000

300000 320000 50000 260000 285000 15000 560000 605000 65000 45000 2000

30000 15000







Unrealised profit on stock = 25/125X Rs10000 = Rs 2000. RLtd. is holding 100% equity shares of SLtd.Therefore, the entire amount of Rs 2000 is to be provided for unrealised profit.

A member company may transfer fixed assets or stock which becomes fixed assets of the transferee company at a profit. In this case , a similar problem arises as that seen in connection with trading stock transfer. At the time consolidation , unrealised profit should b deducted from consolidated profit as well as aggregate value of fixed assets.

Bonus share out of the profit of pre acquisition period:No adjustment is made in consolidated account.

Bonus share out of the profit of post acquisition period:Investment a/c Dr To capital reserve a/c xxx xxx

Purchases consideration > (face value of shares + capital profit) Difference will be added to goodwill Purchases consideration < (face value of shares + capital profit) Difference will be added to capital reserve

Dividend on pref. share Profit of subsidiary company is reduced with that amount profit of holding company is increased with that amount

Dividend of pref. share belonging to minority share holder is added in finding out their interest. If the holding co. has not purchased pref. shares then such share holders will be included in minority interest.

Ex. The holding co. purchased 7500 10%pref. shares of Rs 10 each of subsidiary co. and the total 10% pref. share of subsidiary co. is 10000 The balance of minority interest is 20000

Total minority interest will be :

Opening balance Add: dividend Add : pref. share not taken by holding co. closing balance of minority interest 20000 2500 22500 25000 47500

If shares are purchased in two or more blocks then it is said as purchase of shares in instalment. Division of profit between pre and post acquisition will depend upon the lots in which shares are purchased.

It will be appropriate to follow a step by step system for analysing the profits between capital and revenue. For ex. If the shares are purchased in three instalments then share of profit should be calculated individually for each installment.