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    Consolidation of Accounts

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    Raghav Maheshwari
    Consolidation of accounts

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    Consolidation of Accounts

    Uploaded by

    Raghav Maheshwari
    2 views14 pages
    Consolidation of accounts

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    Consolidation of accounts

    Copyright:

    © All Rights Reserved
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    Download as pptx, pdf, or txt
    2 views14 pages

    Consolidation of Accounts

    Uploaded by

    Raghav Maheshwari
    Consolidation of accounts

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    Consolidation of

    Accounts

    -Mr. Raghav Maheshwari


    Asst. Prof. GLA University , Mathura
    Meaning of Holding
    Company
    A holding company is one which acquires all or
    a majority of the equity shares of any other
    company called subsidiary company in order to
    have control over the subsidiary company. In
    order to understand the financial position of
    holding company, consolidations of accounts
    become very vital.
    Why Consolidation of Accounts
    is Useful
    • A consolidated financial statement is very
    useful for investors. It helps investors to
    easily understand overall corporate
    performance, without getting into each
    subsidiary’s details.
    Definitions as per Companies
    act 2013
    • Definition of Holding company: According to section 2(46) of the Companies Act,
    2013, “holding company”, in relation to one or more other companies, means a company of which
    such companies are subsidiary companies.

    • Definition of Subsidiary Company: According to section 2(87) of the Companies Act,


    2013, “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the
    holding company), means a company in which the holding company—
    (i) controls the composition of the Board of Directors; or
    (ii) exercises or controls more than one-half of the total share capital either at its own or together with
    one or more of its subsidiary companies.
    Provided that such class or classes of holding companies as may be prescribed shall not have
    layers of subsidiaries beyond such numbers as may be prescribed.
    The definition of a subsidiary as per the 2013 Act includes associates and joint ventures.
    Explanation with Example

    Suppose, H is holding company of S because 51 % shares are of H in S. S is also of holding


    Company of R
    because S have power to appoint the board of directors of R Company and then H is also holding
    Company of R.
    Example in layman’s Language
    Father has 1000 rupees and son has 100 rupees.
    Out of 100 rupees of son, 80 Rs have been borrowed from father and
    other 20 rupees have been borrowed by him from his friends.
    If I want to know the financial position of Father and son collectively,
    I shall not consider the loan taken by son from father. Instead I will add
    up father’s and son’s amount (i.e.1000+100) and thereafter deduct 20
    borrowed from friends. Therefore the collective networth of Father and
    son will be 1080 (i.e. 1000+100-20).
    =
    Example with graphics:
    Balance Sheet of Holding Co: Balance Sheet of Subsidiary Co
    Adjustment of Reserve and Profits of
    Subsidiary appearing at the time of acquiring
    shares
    If Investment in subsidiary is recorded at the book value, no adjustment
    is required but if it is shown at a value lower than book value (say face
    value) then difference will be treated as Capital Reserve and if it is
    recorded at a value higher than the book value then difference will be
    treated as Goodwill.
    Formula:
    Goodwill=(Cost of acquisition of shares in Subsidiary-Intrinsic value of
    shares acquired in subsidiary)
    Capital Reserve=(Intrinsic value of shares acquired in subsidiary-Cost of
    acquisition of shares in subsidiary)
    Post Acquisition Profits
    Profit earned by subsidiary company after the acquisition of shares in it
    by holding company will be treated as Revenue profits and will be
    shown as General Reserve or Profit and loss account in the
    Consolidated Balance Sheet.

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