Consolidation financial statement

1. The entity concept of the accounting is extended in the form of the group. This group contains the “Parent + Subsidiary”. The mixture of the accounts of the parent and subsidiary together are termed as consolidating the accounts.

2. The company which has control over the other is termed as Parent Company and other ho is under the control is subsidiary company.

3. How the control can be made:a. By the composition of the BODb. By holding majority of shares (“A” company holds more than half of the nominal value of the

equity share capital of “B” then B is Subsidiary of A)c. Indirect control (A is parent of B and B is parent of C then A is parent of C)d. Exceptions

4. Accounts:a. A copy of the B/S of Subsidiary:

i. Copy of B/S of subsidiary must be attached with the holding.ii. The last day of subsidiary must match with the last day of the parent.

iii. If they do not match then B/S of the subsidiary must be made as of its own last day but the period of difference between them should not be more than 6 months.

iv. A copy of the P&L A/Cv. A copy of the report of its board.

vi. A copy of report of its auditor.vii. A statement of holding companies interest

viii. A report of lack of the informationb. The accounts are made in accordance with the AS 21.c. Following the AS 21 is the mandatory for the company presenting the accounts.

5. Definitions under AS 21:a. Subsidiary: it is the company which is controlled by another.b. Parent/holding: it is a company which exercises his control over the subsidiary.c. Equity: Equity = Assets – Liabilitiesd. Minority interest: it is that part of the subsidiary which is not directly or indirectly owned by

the parent after all the operations.6. Scope of the CFS:

a. If parent consolidates the financial statements of the subsidiaries then it must consolidates its all domestic and foreign subsidiaries but not just selected few ones.

b. No consolidation is requires in the following cases:i. Amalgamation ( as it is governed by AS 14)

ii. Associates (as it is governed by AS 23)iii. Joint ventures (as it is governed by AS 27)iv. Subsidiary where the control is temporary in nature.v. Gratuity and Provident fund Trust od subsidiary (as here parent is not holding

subsidiary to get any economic benefits of the subsidiary)c. Format: It will be adopted same as that of the parent for its separate financial statement.d. Basis: The items are combined by line by line basis.

7. Steps in the consolidation:a. Eliminate the parent cost of investment & portion of Equity.b. Calculate the G/w or capital reserve arising on investment.c. Calculate the minority interest.d. Analysis the profits of the subsidiary into Pre and Post.e. Make intra group adjustments.f. Treatments on investments made on different dates.g. Consolidate the P&L A/c.h. Harmonies the reporting dates.

i. Harmonies the accounting policies.8. Eliminating the parents Cost of investment and Portion of the equity:

a. Suppose “A” company is the subsidiary of the “B”. Then A’s investment in the B will be reflecting in the “A’s” B/s as an investment. And “A’s” investment in the B will be there in the equity of the B.

b. “A’s” investment has to be set off against the “B’s” net worth.c. Cost of Parent’s investment in the subsidiary is eliminated against the parent’s portion of the

equity in the subsidiary at the date on which the investment in the subsidiary is made. 9. How to calculate the goodwill or capital reserve in the investment:

a. There will be no G/W or capital reserve if Cost of investment by parent = Equity portion of parent in the subsidiary. It is known as investment at PAR.

b. Investment tis at premium when cost of investment > Portion of Equity. This is referred to as G/W

c. Investment tis at discount when cost of investment < Portion of Equity. This is referred to as Capital Reserve.

d. Finding the G/W or Capital Reserve is known as “cost of Control”.a. Investment tis at premium when cost of investment > Portion of Equity. This is referred to as

G/W

Calculation of the Cost of control

Cost of investment of holding CompanyLess: Portion of the Equity of the holding in the subsidiary company

xxxxxx

Goodwill or Capital reserve xxx

10. Minority Interest:

1. There is no question of the minority interest if the parent holds 100% shares in the subsidiary.2. But generally, the parent doesn’t hold all the shares of the subsidiary, say parent holds 4/5 th share of

equity (or net assets) the shares. So 1/4th share of equity (or net assets) is held by the outsiders. Such share of outsiders is known as Minority interest.

3. Minority interest is shown under separate head called “Minority interest” in the liability side.4. Minority interest can be negative. 5. How to adjust the negative minority interest:

a. It has to be adjusted against the majority interest except to the extend minority has the binding to and is able to make the good loss.

b. Set off against the subsequent profit: if later the subsidiary shows the profit, such profit will be used to set off the minority loss till the loss has been fully absorbed.

11. Analyzing the profit of the Subsidiary:

1. Profit of subsidiary has to be divided into the pre and post profits.2. All the profits earned by the company before the investment by the holding it the subsidiary are

called Capital profits or Pre acquisition profit. This is to be calculated for finding the cost of control (i.e. to find out goodwill or capital reserve)

3. All the profits earned by the company after the investment by the holding it the subsidiary are called revenue profits or Post acquisition profit. This is to be calculated in order to prepare the consolidation profit and loss account. The holding company’s share in the revenue profit has to be added in the revenue profits of the holding company.

4. Minority interest of the subsidiary = revenue profit’s share held by the outsiders + capital profits share held by the outsiders + share capital’s share held by the outsiders.

5. Date of Acquisition:a. If acquisition is made on the last date of the subsidiary’s accounting period then entire

balance in the P&L and reserves will be the capital profits for the current year.

b. If acquisition is made on the first date of the subsidiary’s accounting period then entire balance in the P&L and reserves will be the capital profits for Previous Year.

c. If the date of acquisition in on other day of the accounting period of the subsidiary, then the profit and loss a/c balance and the other reserves are to be divided as per pre and post or on time basis.

6. Dividend:a. The dividend can be paid by the subsidiary to its shareholders. So the holding company will

also get dividend from the subsidiary on account of its being stakeholder.b. There can be two possibilities now:

i. The dividend paid by the subsidiary to its holding is out of the capital profits.ii. The dividend paid by the subsidiary to its holding id out of the revenue profits.

c. If dividend is paid out of the capital profits then such dividend receipt by the holding company has to be deducted from the cost of investment.

d. If dividend is paid out of the revenue profits then such dividend receipt by the holding company has to be shown as income in the profit and loss a/c.

7. Bonus shares issued by the subsidiary company:a. Bonus declared from the capital profits has to be deducted from the capital profits.b. Bonus declared from the revenue profits has to be deducted from the revenue profits.c. Amount of bonus which is yet to be declared and due is to be divided among the holding

company and the minority interest in respect of ratio of their shareholding.d. Bonus which is already received either from the post or pre acquisition profits has no effect

on the cost of control of the holing company.