Background of Consolidation Financial Statement

Modern accounting was developed in Italy in the late 15th century. It was only at the beginning of the 20th century that consolidated financial statements arose in USA. Corporations in Europe followed during the 1920s and 1930s. It wasn't until the 1940s, however, that legislation began to handle the subject. One of the main reasons why legislation was introduced in Sweden was the Kreuger Crash of the early 1930s. The empire of Ivar Kreuger was composed of companies all over the world. The companies often had different financial years. Due to possibilities to transfer gains and losses between the companies, all companies were able to show profits. Assets were sold between the companies with profit close to the year-end closing for the selling company. When the bubble burst the fact came out that the companies were overvaluing their assets. These transactions would not have resulted in these horrid consequences if there had been demands for consolidated financial statements with elimination of internal income/expense, profits/losses, assets and liabilities.

Introduction
This AS comes into effect in respect of accounting periods commencing on or after 1-4-2001. AS 21 lays down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (holding company) to provide financial information about the economic activities of the group as a single economic entity. A parent which presents consolidated financial statements should present their statements in accordance with this standard but in its separate financial statements, investments in subsidiaries should be accounted as per AS 13.

Joint accounts for the companies in the groups, the elimination of shares, the adjustments etc. form the consolidated financial statements. Enclosure 1 shows a group consisting of a parent company with two subsidiaries. The first subsidiary has been part of the group for a number of years. The second subsidiary was acquired by the parent company during the past year. Based on these conditions the acquired equity is eliminated together with the acquired income statement of subsidiary. Depreciations are made on the acquired surplus values. The depreciations reduce deferred tax. Internal income, expenses and the result are adjusted along with internal receivables and liabilities. Finally, untaxed reserves are converted to non- restricted equity and deferred tax.

What are Consolidated Financial Statements (CFS)?

Consolidated financial statements are fiction. It shows the result and position that would have occurred if the parent company had directly bought the assets and liabilities of the subsidiary instead of the shares.

CFS are made using a cross- indexed summary of similar assets, liabilities, income and costs for the different group companies. Everything should be valued according to the same principles, recalculated to the same currency and closed at the same date. Since the objective is to show the group as if they were one company, all internal balances and earnings must be eliminated and only show profits/losses that are earned by the parent company or by the subsidiaries after they joined the group.

The acquisition in the parent company of a subsidiary is regarded as an acquisition of the assets and liabilities of the subsidiary in CFS. The shares in the subsidiary are substituted for the assets and liabilities of the subsidiary. The assets and liabilities are revaluated to the acquisition cost of the parent company.

Meaning & Definition vide as 21

For the purpose of this Standard, the following terms are used with the meanings specified: A parent (also known as a Holding Company) is a company that has one or more subsidiaries. The company which has control over another company is known as the Holding Company (Parent company). A subsidiary is an enterprise that is controlled by another enterprise (known as the parent). The company over which control is exercised is called the Subsidiary Company. A group is a parent and all its subsidiaries. GROUP as an accounting entity The accounting concept of Entity can be extended to a group of companies controlled by a parents company. Such group, made up of the parents + subsidiary companies, is regarded as a single entity for the purpose of accounting. The financial statements of all companies in the group are added together (consolidated). Consolidated financial statements are the financial statements of a group presented as those of a single enterprise. Equity is the residual interest in the assets of an enterprise after deducting all its liabilities. Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent.

Control:

(a) The ownership, directly or indirectly through subsidiaries, of more than one-half of the voting power of an enterprise; or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

Objectives
The objective of this Statement is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated Financial Statement is prepared by the holding/parent company to provide financial information regarding the economic resources controlled by its group and results achieved with these resources. This consolidated financial statement is prepared by the parent company in addition to the financial statement prepared by the parent company for only it's own affairs. Hence parent company prepares two financial statements,one for only its own affairs and one for taking the whole group as one unit in the form of consolidated financial statement. Consolidated financial statements usually comprise the following: Consolidated Financial Account Consolidated Profit & Loss Statement Notes to Accounts, other statements and explanatory material Consolidated Cash Flow Statement, if parent company presents its own cash flow statement. While preparing the consolidated financial statement, all other ASs and Accounting Policies will be applicable as they are applied in parent companys own financial statement.

Scope
a. This Standard should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

b. This Standard should also be applied in accounting for investments in subsidiaries in the separate financial statements of a parent.

c. In the preparation of consolidated financial statements, other Accounting Standards also apply in the same manner as they apply to the separate financial statements.

d. Exclusion

In the following cases the consolidation is not done

Amalgamation Associates Joint ventures Gratuity / PF Trust of sunsidiaries whose composition of the governing bodies is controlled by the holding company. Since the objective of control over such entities si not to obtain economic benefits from their activities, these are not considerd for the purpose of preparation of consolidated financial statements.

Subsidiary where control is Temporary or restricated.

Advantages of CFS
The main advantages of consolidation are given below:

a. Overall Picture: From the consolidated financial statements, the users of accounts can get an overall picture of the holding company and its subsidiaries. Consolidated profit and loss account gives the overall profitability of the group after adjustment of unrealized profit involved in mutual transaction and division of profit of the subsidiaries into capital and revenue. Similarly Consolidated Balance Sheet shows the state of affairs of the group after adjustments of mutual indebtedness and putting separately the minority interest. b. Share Value of Holding Co.: Intrinsic share value of the holding company can be calculated directly from the Consolidated Balance Sheet. c. Return on Investments in Subsidiaries: The holding Company controls its subsidiary. So its return on investment in subsidiaries should not be measured in the terms of dividend alone. Consolidated Financial Statement provides information for identifying revenue profit for determining return on investment. d. Acquisition of subsidiary: the Minority Interest data of the Consolidated Financial Statement indicates the amount payable to the outside shareholders of the subsidiary company at book value which is used as the starting point of negotiations at the time of acquisition of a subsidiary by the holding company. e. Evaluation of Holding Company in the market: The overall financial health of the holding company can be judged using Consolidated Financial Statement. Those who want to invest in the shares of the holding company or acquire it, need such data.

Disadvantages
a. Credit Implications : Just as much as consolidation can improve your credit, you can also lower your credit profile by consolidating with a person or business with worse credit than your own. Unless both parties have similar credit profiles, it is likely that one party is taking a hit to their credit to some degree. This can be minimal depending on the advantages of other factors, but it could be a significant impairment to your ability to get lines of credit at good rates.. b. Shared Information : It is important to trust the individuals involved in your consolidation. If the financial change is between spouses and individuals, it is likely you already trust that person with having access to your personal financial history and credit information. In a business situation, though, this can be dangerous . c. Changed Debt-to-Income Ratio : Different individuals and businesses have different amounts of debt and income. A healthy debt-to-income is desired, with debts comprising only a fraction of total earned income. The smaller this ratio is, the better for both the credit and financial stability. Because of the multiple ways in which this can affect personal finances or a company's financial profile, it is important that the debt-to-income ratios of all parties be examined. If you are taking on much more debt at the gain of minimal income -- particularly income that does not cover the debt or does not seem promising -- your party may be at a distinct disadvantage.

Contents of CFS
1. a. b. c. d. Which Statements: Consolidated financial statements normally include Consolidated balance sheet, Consolidated statement of profit and loss, and Notes, other statements and explanatory material that form an integral part thereof. Consolidated cash flow statement is presented in case a parent presents its own cash

flow statement. 2. Format: The consolidated financial statements are presented,to the extent possible, in

the same format as that adopted by the parent for its separate financial statements.

Basis of Consolidation
In preparing CFS, the financial statements of the parent and its subsidiaries should be combined on a line by line basis adding together like items of assets, liabilities, income and expense.

Format : 1 Working Note for Calculation

I. Date of Acquisition of Control

The date on which investment in the subsidiary is made. II. % of Holding

How much percent of share holding company acquire & how much for minority company ? III. Capital Profit

If acquisition is on last day of the year; then all profit during the year are Capital Profits. These profits are divided between Holding & Minority Company. IV. Revenue Profit

If acquisition is on first day of the year; then all profit during the year are Revenue Profits. These profits are divided between Holding & Minority Company.

V.

Cost of Control Cost of investment in subsidiary company as per A/C of holding company (-) Normal value / face value (of share held in subsidiary company) Capital profit of Holding company Dividend for pre acquisition period (+) Goodwill (-) Capital reserve XX XX XX XX XX

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VI.

Minority interest Nominal value share held by minority (+) Share capital profit of minority (+) share of revenue profit XX XX XX

VII.

Reserve & Surplus (holding company) P/L A/C (+) Share of Revenue profit XX XX

Format : 2

Old Schedule

Consolidated Balance Sheet of Holding & Subsidiary company Liability

Share capital Reserves & Surplus Minority interest Secured Loans Unsecured Loans Current liabilities & Provisions

Rs.

Assets

Rs.
XX XX XX XX XX

XX Fixed Assets (net) XX Goodwill XX Investments XX Current Assets, Loan & Advances XX Misc. Exp. Not W/O XX XX

XX

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Revised Schedule VI Consolidated Balance Sheet of Holding & Subsidiary company

Particulars Yr. Schedule Current Yr. Previous

Equities & Liabilities

a. Shareholders fund Share Capital Reserves & Surplus b. Non Current Liabilities XX XX XX XX XX XX XX

Bonds / Debentures Loan from Bank Loan from others Public Deposits Deffered Tax Liability c. Current Liability Short term Borrowing Trade payable Other Current Liability Short term Provision Total

XX XX XX XX XX

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Assets
d. Non Current assets Fixed assets Tangible assets Intangible assets Capital WIP Non Current investment Long Term Loan / Advances e. Current Assets Current Investment Inventories Trade Receivable Cash & Bank Short Term Loan / Advances Other Current Assets XX XX XX XX XX XX XX XX XX XX XX XX

Total

XX

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Steps in Consolidation Vide As 21

In order that the consolidated financial statement presents financial information about the group as that of a single enterprise, the following steps should be taken:

1.

Eliminate Parents Cost of Investment & portion of Equity

Investment made by Holding Company in the equity shares of subsidiary companies is replaced by the subsidiarys assets & liassbility. The Holding Companys Investment in shares of Subsidiary and the corresponding Equity of the Subsidiary held by the Holding Company is set off against each other. E.g. 1) (100% subsidiary eliminating investment) B/S as at 31 December, 2012 Liability Share capital of rs. 10 each Sundry creditors H Ltd. 100000 100000 S Ltd. 50000 30000 Assets Sundry assets H Ltd. 150000 S Ltd. 80000

Investment 5000 shares 50000 at par

200000

80000

200000

80000

Note : Invt. which is made by holding company in the subsidiary company is replaced by the subsidiaries assets & liabilities. The invt. a/c of H Ltd. And the capital of S Ltd. is set off against each other.

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012

Liability Share capital Equity share capital 10,000 Equity Shares of Rs.10 each, fully paid Reserves & surplus Minority interest

Rs.

Assets Fixed Assets (Net)

Rs. NIL

H 100000 NIL NIL Investment C.A, Loans Sundry Assets & advance H S 150000 80000 230000 NIL NIL

Secured Loans Unsecured Loans Current Liabilities & Provisions Sundry Liabilities H S Total 100000 30000

NIL NIL

MISC. Exp. Not W/O

130000 230000 230000

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2.

Calculate Goodwill or Capital Reserve Arising on Investment

The difference between the investment and net worth will give rise to goodwill or Capital Reserve. Goodwill An investment made at a Premium gives rise to goodwill . any excess of the cost to the parent of its investment in a subsidiary over the net worth of the subsidiary, at the date on which investment in the subsidiary is made, should be treated as goodwill and recorded as an asset in the CFS. E.g 2) (100% subsidiary Goodwill on eliminating investment) B/S as at 31 December, 2012 Liabilities Share capital of rs. 10 each Sundry creditors H Ltd. 100000 100000 S Ltd. 50000 30000 Assets Sundry assets H Ltd. 130000 S Ltd. 80000

Investment 5000 shares 70000 at par

200000

80000

200000

80000

Note : Cost of Control Cost of investment of Holding Company (-)Share of amount of equity of Subsidiary Goodwill in CBS 70000 50000 20000

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012

Liability Share capital Equity share capital 10,000 Equity Shares of Rs.10 each, fully paid Reserves & surplus Minority interest Secured Loans

Rs.

Assets Fixed Assets (Net)

Rs. NIL

H 100000 NIL NIL NIL Goodwill Investment C.A, Loans Sundry Assets & advance H S 130000 80000 210000 NIL 20000 NIL

Unsecured Loans Current Liabilities & Provisions Sundry Liabilities H S Total 100000 30000

NIL

MISC. Exp. Not W/O

130000 230000 230000

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Capital Reserve An investment made at a Discount gives rise to Capital Reserve. When the cost to the parent of its invt. in a subsidiary is less than the net worth of the subsidiary, at the date on which investment in the subsidiary is made, should be treated as Capital Reserve and recorded as an asset in the CFS. It is negative cost of control. E.g 3) (100% subsidiary Capital Reserve on eliminating investment) B/S as at 31 December, 2012

Liabilities Share capital of rs. 10 each Sundry creditors

H Ltd. 100000 100000 200000

S Ltd. 50000 30000 80000

Assets Sundry assets Investment 5000 shares

H Ltd. 170000 30000 200000

S Ltd. 80000

80000

Note : Cost of Control Cost of investment of Holding Company (-)Share of amount of equity of Subsidiary Goodwill in CBS 30000 50000 (-)20000

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012

Liability Share capital Equity share capital 10,000 Equity Shares of Rs.10 each, fully paid Reserves & surplus Capital Reserve Minority interest

Rs.

Assets Fixed Assets (Net)

Rs. NIL

H 100000 Investment 20000 NIL C.A, Loans Sundry Assets & advance H S 170000 80000 250000 NIL NIL

Secured Loans Unsecured Loans Current Liabilities & Provisions Sundry Liabilities H S Total 100000 30000

NIL NIL

MISC. Exp. Not W/O

130000 250000 250000

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3.

Calculate Minority Interest

Normally, the Holding company hold only some shares say (3/5th) and the remaining(2/5th) may be held by outsiders. Such interest of the outsiders is known as Minority Interest. According to AS 21, Minority Interest is that part of the net results of operations and of the net asset of a subsidiary attributable to interest which are not owned, directly or indirectly through subsidiary, by the parent. Minority interest should be presented in the consolidated balance sheet separately from liabilities and the equity of the parents shareholders under the heading minority interest.

4.

Analyse Profits of Subsidiary into Profits before and after Acquisition

All reserves and profits of subsidiary company should be classified into pre and post acquisition reserves and profits. We have analyse whether the investment is made on the last day of the year or on the first day of the year or during any other day in the year.

Acquisition on last day :

If the acquisition is on the last day of the current accounting year of the subsidiary, its entire balances in the P&L a/c and reserves shown in the closing balance sheet of the current year are taken as capital profits.

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E.g 4) Acquisition on Last Day of the Year B/S as at 31 December, 2012 Liabilities Share capital of rs. 10 each Profit and Loss A/c H Ltd. 100000 20000 S Ltd. 50000 5000 Assets Sundry assets Investment 5000 shares in S Ltd. General Reserves A/c Sundry Liabilities 10000 10000 140000 4000 1000 60000 140000 60000 75000 H Ltd. 65000 S Ltd. 60000

H Ltd. acquired the shares of S Ltd. on 31st December 2012. Prepare a consolidated balance sheet. Working Note:

I.

Date of Acquisition of Control H Ltd. acquire control in S Ltd. as on 31st December, 2012

II.

Capital Profit Profit & Loss A/c on Date of Acquisition General Reserve on Date of Acquisition 5000 4000 9000

III.

Cost of Control Cost of investment in S Ltd. (-)Paid up value of shares Capital profit of Holding company Goodwill 50000 9000 59000 16000 75000

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December 2012

Liability Share capital Equity share capital 10,000 Equity Shares of Rs.10 each, fully paid Reserves & surplus Capital Reserve Consolidated P & L A/c Minority interest

Rs.

Assets Fixed Assets (Net)

Rs. NIL

H 100000 Goodwill 10000 20000 NIL Investment NIL 16000

Secured Loans

NIL

C.A, Loans Sundry Assets

& advance H S 65000 60000 125000 NIL

Unsecured Loans Current Liabilities & Provisions Sundry Liabilities H S Total 10000 1000

NIL

MISC. Exp. Not W/O

11000 141000 141000

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 Acquisition on first day :

If the acquisition is on the first day of the current accounting year of the subsidiary, its entire balances in the P&L a/c and reserves shown in the closing balance sheet of the previous year is taken as capital profits. E.g. 5) Acquisition on First Day of the Year B/S as at 31 December, 2012 Liabilities H Ltd. S Ltd. 600000 Assets Freehold premises H Ltd. 900000 S Ltd. 240000

Share capital of Rs. 10 2000000 each Profit and Loss A/c General Reserves A/c Sundry creditors 600000 800000 200000

350000 250000 140000

Plant & M/C Furniture Debtor Stock Investment shares in S Ltd. Cash in hand 40000

700000 160000 600000 640000

320000 60000 340000 320000

520000 80000 60000

3600000

1340000

3600000 1340000

Adjustment:X Ltd. purchase the share of Y Ltd. on 1 January,2012 when balance in P/L A/c & G.R were Rs.150000 & Rs.160000 respectively then included in Drs. In X Ltd. Rs. 30000 due from Y Ltd. Prepare Consolidated b/s of XY Ltd. Working Note:

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I.

Date of Acquisition of Control H Ltd. acquire control in S Ltd. as on 1st January , 2012

II.

% of Holding H Ltd. (holding company) S Ltd. (minority company) = 3200/4000*100 = 800/4000*100 = 80% =20%

III.

Capital Profit Balance in P/L a/c General Reserve = = 150000 160000 310000 Capital Profit divided into :H Ltd. = 310000*2/3 = 206667 = 103333

Minority company = 310000*1/3 IV. Revenue Profit Balance in G.R (-)G.R as on 1.01.12 Transfer during the year Bal. in P/L a/c as on 31.12.12 (+) Transfer to G.R = 250000 = 160000 90000

350000 90000 440000

(-) Bal. in P/L a/c as on 1.1.12 Revenue profits

150000 290000

Revenue Profit divided into :H Ltd. Minority company = 290000*2/3 = 290000*1/3 = 193333 = 96667

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V.

Minority interest Nominal value of 20000 shares 200000

(+) Share in capital profit (+) share in revenue profit

103333 96667 400000

VI.

Reserve & Surplus (holding company) Bal. in P/L A/C 600000

(+) Share of Revenue profit

193333 793333

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December, 2012

Liability Share capital Equity share capital 10,000 Equity Shares of Rs.10 each, fully paid

Rs.

Assets Fixed Assets (Net) Freehold premise Plant & M/C Furniture

Rs.

1140000 1020000 220000

H 2000000

Reserves & surplus General Reserve Consolidated P & L A/c Minority interest

86667 800000 793333 400000

Cash

140000

C.A, Loans Inventories Debtors

& advance 960000 910000 NIL

Secured Loans Unsecured Loans Current Liabilities & Provisions Sundry Creditors (340000-30000) Total

NIL NIL

MISC. Exp. Not W/O

310000 4390000 4390000

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 Acquisition in mid year or during Year :

If the acquisition is during any other day of the current accounting year of the subsidiary its balances in the P/L a/c and reserves shown in the available balance sheet are to be divided between Capital Profits and Revenue Profits. E.g. 6) Acquisition in mid Year B/S as at 31 December, 2012 Liabilities Share capital of Rs. 1 each Profit and Loss A/c H Ltd. 12000 2000 S Ltd. 50000 1500 Assets Sundry assets Investment 5000 shares in S Ltd. General Reserves A/c Sundry creditors 5000 7500 26500 500 1000 8000 26500 8000 6500 H Ltd. 20000 S Ltd. 8000

Shares were acquired by H Ltd. on 1st October, 2012. Reserves in S Ltd. show opening balance b/d. P/L A/c in S Ltd. show the profits earned during the year.

Prepare CBS

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Working note :

I.

Date of Acquisition of Control H Ltd. acquire control in S Ltd. as on 1st October, 2012 Pre acquisition period (Capital profit) 1.4.12 - 30.9.12

Post acquisition period (Revenue profit) 1.10.12 - 31.3.12

II.

Capital Profit Profit & Loss A/c (1500/2) General Reserve 750 500 1250

III.

Revenue Profit Profit & Loss A/c (1500/2) 750

IV.

Cost of Control Cost of investment in S Ltd. (-)Paid up value of shares Capital profit of Holding company Goodwill in CBS 5000 1250 6250 250 6500

V.

P&L A/c P & L A/c of H Ltd. (+) RP of S Ltd. Consolidated P & L A/c 2000 750 2750

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Solution:Consolidated Balance Sheet of H Ltd. & S Ltd. as on 31 December, 2012

Liability Share capital Equity share capital 12,000 Equity Shares of Rs.1 each, fully paid Reserves & surplus General Reserve (H) Consolidated P & L A/c Minority interest H

Rs.

Assets Fixed Assets (Net)

Rs. NIL

12000 Goodwill 5000 2750 NIL C.A, Loans Sundry assets H S & advance 20000 8000 28000 NIL 250

Secured Loans Unsecured Loans Current Liabilities & Provisions Sundry Creditors H S Total 7500 1000

NIL NIL

MISC. Exp. Not W/O

8500 28250 28250

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5. Intra-Group Adjustment It is natural for a company to sell goods to its subsidiary and vice versa. Usually goods are sold at normal selling price. For the purpose of consolidation of financial statement, profit on goods received from the other company of the same group but sold away before the balance sheet date raises no problem. But in respect of such goods not yet sold, the unrealized profits are to be eliminated. Also unrealized losses resulting from intra group transactions should also be eliminated unless cost cannot be recovered. There is some of the adjustment which is used in a Consolidation:

Dividends: The holding company, when it receives a dividend from subsidiary company, must distinguish between the dividend received out of capital profits and that out revenue profits. The dividend received out of capital profits is credited to Investment Account, it being a capital receipt. Dividend received out of revenue profits is, being revenue income, credited to the Profit & Loss Account. Revaluation of Fixed Assets: For ascertaining the fair price for acquiring shares, the holding company may revalue the fixed assets of the subsidiary company. The assets may be revalued upwards or downwards. The depreciation on the difference between the revalued amount and the book value also need to be adjusted, depending on the details available.

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Issue of Bonus Share out of Pre acquisition Profits: While calculating the cost of control, when one the one hand holding companys share in the pre-acquisition profit is reduced (because of capitalisation of profit), on the other hand, the paid up value of shares held increase. Thus, there is no effect on cost of control of the bonus shares issued out of preacquisition profits. Issue of Bonus Share out of Post acquisition Profits: When a subsidiary company capitalises profits by the issue of bonus shares out of the post-acquisition profits, it is necessary that holding companys share in the revenue profits of the subsidiary company be calculated only after making adjustments for such bonus shares from the post acquisition profits. It will have effect of reducing share of holding company in the post-acquisition profits of the subsidiary company. However, in this case the cost of goodwill will be reduced because of the increase in paid-up value of shares (without) increasing the cost of shares and without reducing the pre-acquisition profits of subsidiary company.

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E.g.7)

The Balance sheet of H & S Ltd. As on 31.3.2012 were as follow:-

Liability Equity Share of Rs. 100 each fully paid up 15% Pref. share capital G.R (1.04.2012)

H 9000000

Assets

H 600000

S 260000

400000 L & B

300000 200000

40000

Plant & M/C

480000

180000 -

120000 Invt. in 3000 eq. share of S Ltd. Purchase on 30.9.2012

P/L A/C B.P Crs.

280000 40000 160000

180000 Stock Drs.

200000 40000 120000 10000 70000

180000 150000 40000 60000

100000 Cash at bank Preliminary exp. Gwill

Adjustments:15% dividend on both types of shares was paid in Oct. 2012 for the year ended 31st march 2012 H Ltd. credited the dividend received to his P/L account. Plant & M/C as per a/c was 200000 on 1.4.2012 H Ltd. revalued it by upward amount by 100000 which is not recorded. There was a bonus issue of equity shares of 40000 out of post acquisition profit by S Ltd. which is not recorded.

Credit balance of P/L a/c on 1.4.2012 was 106600 of S Ltd. Included in creditors of S Ltd. are 40000 for goods supplied by H Ltd. also included

in S Ltd. stock of goods supplied by H Ltd. remain unsold & H Ltd. charge profit at 25 % on sales.

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Working Note :

I.

Date of acquisition of control :-

H Ltd. acquire control in S Ltd. As on 30 September 2000 II. H Ltd. Minority III. G.R P/L a/c (as on 1.4.2000) (+) Current year profit upto 30.9.2000 (-) dividend for year ended 31.3.2000 Pref.share capital (40000*15%) Equity share capital (400000*15%) (+) increase in plant & M/C (-) preliminary written off Percentage of holding := = 3000/4000 1000/4000 = = 75% 25%

Capital profit as on 1.04.2001 120000 1066000 69700 296300 6000 60000 100000 10000 320000

Capital profit allotted into :-

H Ltd.

320000*3/4

240225

Minority interest

320000*1/4

80075

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IV.

Cost of control

Cost of investment in S Ltd.

480000

(-) nominal value of shares

3000 share @ 100

300000

300 bonus @ 100

30000

Dividend for pre acquisition

300000*15%

45000

Capital profits

240225

615225

Capital reserve

(-)135225

V.

Revenue profit 69700 40000 5000 24700

Revenue profit of S Ld. (-) issue of bonus share Dep. on plant & M/C (100000*10%*6/12)

Revenue profit allotted into :H Ltd. Minority interest 24700*3/4 24700*1/4 = = 18225 6175

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VI.

Minority Interest

Nominal value of share 1000 shares @ 100 100 bonus @ 100 15% pref. share capital Share in capital profit Share in revenue profit 100000 10000 40000 80075 6175 236250 VII. Resrve & Surplus of H Ltd. Balance in P/L a/c (+) share in revenue (-) dividend trf. to invt. a/c (-) unrealized profits in intercompany transaction 280000 18225 45000 10000 243525

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Solution:Consolidate balance sheet of HS Ltd. As on 31.3.2001 Liability Equity share of Rs.100 each fully paid Pref. share capital of H Ltd. G.R P/L a/c B.P Crs. Minority interest Capital reserve 300000 200000 243525 40000 220000 236250 135225 2275000 2275000 L&B Plant & M/C Stock Drs. Cash 860000 605000 370000 150000 160000 Rs. 900000 Assets Gwill Rs. 130000

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Summary
A company that owns more than 50% of the votes in another company is a parent company to the subsidiary owned. Together they form a group which is obligated to submit consolidated financial statements. It is also mandatory to issue consolidated financial statements when a company has determining influence over another company. Consolidated financial statements are prepared in order to show all the companies in the group as if they were one. All companies in the group must apply the same accounting principles and accounting year as the parent company. Internal income, expenses and profits/losses must be eliminated from the income statement. The same goes for internal receivables and liabilities in the balance sheet. The consolidated financial statements are guided by both national and international laws and recommendations. The most common method to apply consolidated financial statements is the purchase method. This method is based on an acquisition analysis which determines the acquired equity of the subsidiary. The acquired equity is never included in the equity of the group. It is only the equity of the parent company and profits/losses in the subsidiaries after the acquisition that should be included in the equity of the group. The acquisition analysis changes constantly as acquired surplus values and deferred tax are reduced as depreciations and tax expenses.

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BIBLOGRAPHY
Advanced Financial Accounting (M.Com I) Dr. Varsha M. Ainapure (Sem. I & II) Edition: September 2010 MANAN PRAKASHAN www.google.com www.icai.org www.itcportal.com
www.mca.gov.in

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