FA3

27An Analysis of Consolidated and Parent-Only Financial Statements of Indian Companies

Introduction

Consolidated Financial Statements (CFS) refers to the financial statements presented by the

holding company which is related to its individual operations and also to the group as a

whole. The purpose of CFS is to present the financial statements of not only the parent (holding)

company but also its subsidiaries as one entity, as it provides more information to the shareholders

and creditors. This paper explores the need for and the development of CFS in India.

Corporate financial reporting in India is subject to the provisions of the Companies Act,

1956. The Corporate Law Committee that was responsible for formulating the Companies Act

had recommended that consolidation was not required and felt that the subsidiaries reports

gave more information than a consolidated one and thus, no additional information was

derived from consolidation (Rammaiya, 1988). Hence, no CFS was required in India for a

long time. Section 212 of the Companies Act required that along with the balance sheet of the

holding company, subsidiarys balance sheet, profit and loss account, the report of the Board

of Directors (BOD) and the auditors report of the holding company are also to be attached.

Additionally, a statement of the holding companys interest in the subsidiary company, net

2008 The Icfai University Press. All Rights Reserved.

An Analysis of Consolidated

and Parent-Only Financial Statements of

Indian Companies

Padmini Srinivasan* and M S Narasimhan**

Along with several new accounting regulations related to disclosure practices, Indian

companies were asked to provide Consolidated Financial Statements (CFS) since 2002.

Unlike other disclosure regulations, consolidation was a major deviation from the earlier

stand that consolidation would not provide additional information to the users of financial

statements. This study examines whether there are any major structural changes in the

operations of Indian companies, which warrant for a review of existing disclosure

regulations, or whether it is mainly to maintain consistency with the international

practices. The study concludes that the change of disclosure regulation favoring

consolidation is more proactive in nature and consistent with the international practices

than changes in the operations of Indian companies.

* Faculty Member, Finance and Control Area of Indian Institute of Management, Bangalore, India.

E-mail: [email protected]

** Faculty Member, Finance and Control Area of Indian Institute of Management, Bangalore, India.

E-mail: [email protected]

The Icfai University Journal of Accounting Research, Vol. VII, No. 3, 200828

aggregate amount that is not dealt within the companys accounts as it relates to the subsidiarys

profit after deducting the losses or vice versa, and the amount of profit or loss for the present

and the previous financial year if dealt with or provided in the companys accounts were also

required. In effect, the shareholders received the individual as well as the subsidiaries financial

statements.

While Indian regulators preferred individual subsidiary companies full financial report

over CFS, the regulators in other parts of the world preferred CFS much earlier. In UK for

example, based on the recommendations of the Cohen Committee report, the CFS was mandated

in the Companies Act 1948. The move towards CFS may have been prompted by certain

corporate failures.1 Although mandated in 1948, companies in the UK had voluntarily started

publishing the CFS much earlier. In his seminal work, Bircher (1988) comments on the regulation

of CFS and concludes that, The actual widespread adoption of consolidated accounting in

Great Britain appears to have merged from a complex set of influences at the end of the war.

A driving force for such presentation was also the fact that there was complete divergence

between ownership and management in Britain by 1936 indicating the movement from an

owner to a managerial society. Bircher (1988) argues that such a disclosure will highlight the

inner reserves which now exist in the form of subsidiary profits not transferred, otherwise the

subsidiary losses not taken up would be disclosed.

A similar situation existed in few other countries like Japan and countries in the European

Union. For example in Japan, parent-only financial statements were prepared initially. Japanese

companies were run by family business groups and succeeded by family generations. The

financing requirement for these companies was more bank driven. Many companies had affiliates

which provided different utilities to the group. These affiliates also held shares (cross holdings)

in each others companies, in a way which helped prevent the takeover threats. The parent-

only financial statements were treated as primary financial statements. The CFS did not represent

the relationship between the group companies and hence, the parent-only statements were

prepared representing the unique culture of the Japanese business group. McKinnon (1984)

traces the CFS preparation by the Japanese companies to raise funds in the foreign capital

markets, specially in the United States. As companies approached capital markets, the exchanges

and regulators demanded CFS in line with requirements of those markets. Moreover, a few

reorganizations occurring on account of earnings management through subsidiary companies

made it mandatory for Japanese companies to prepare the CFS. After the year 1984, Japanese

firms were required to prepare CFS in addition to parent-only financial statements.

The CFS were treated as additional statements. It was perceived that the move towards CFS

was more to decrease the opportunity for accounting manipulation (Lowe, 1990). The move

towards harmonizing of the accounting standards led to the issue of consolidated accounting

in 1997 which became effective from the year 2000. This standard treats CFS as the primary

financial statements. Lowe (1990) in his paper also argues that preparation of CFS without

reconciling with the culture would lead to reports that are less useful to the stakeholders and

thus proposes certain additional statements.

1 Certain corporate scandals especially the Royal Mail and the Dunlop Ltd cases related to accounting may have

influenced to provide CFS in UK. Bircher (1988) discusses the events that lead to the legislation of CFS. See also

Walker (1978, p. 78 ) and Nobes and Parker (1985, p. 218).


The consolidated financial reporting in Australia was several years behind that of the United

Kingdom or United States. The Uniform Companies Act of 1961 required companies in Australia

to disclose certain aspects of holding company. Companies covered by this Act were required

to disclose separately, investments in subsidiaries, the amounts due to and from subsidiaries,

and to provide a statement of how the profits of the subsidiaries were distributed. Whittered

(1986) concludes that in an unregulated market, the move towards consolidated financial

statements were implemented through regulation.

In the European Union, several countries did not prepare the CFS until the Seventh Company

Law Directive was included in their own countrys legislation. Now that European Union

follows the International Accounting Standards, they would also prepare the CFS. In the United

States, CFS was mandated in 1959 through Accounting Research Bulletin 51. The Financial

Accounting Standards Board (FASB) further pronounced several standards (statements) on CFS

since then. In 1995, FASB incorporated the definition of control in its proposed statement for

the purpose of consolidation. In 1999, exposure draft clarified the proposed definition of

control of an entity. The definition of control involved decision-making ability that is not

shared with others. This differs from the earlier view where the focus was on decision-making

powers relating to another entitys individual assets. Thus, in a way the move was closer to the

entity concept of consolidation, moving away from the traditional parent company approach.

The proponents of consolidation argue that CFS provides more relevant information than

individual statements as they reflect the total amount of resources held by the group. They also

argue that CFS takes into account the interrelation and the dependencies of companies with

that of the parent and also provides a fair presentation of its financial position when one

company is having controlling interests in other companies.2 The opposition to CFS stems

mainly from the argument that managements desire to smooth holding companys reported

profits as a means of fostering financial stability (Whittered, 1986). In certain cases, consolidation

actually defeats the purpose of the company promoting subsidiary companies. For example,

a pharmaceutical company in order to separate the regular drug production with drug discovery

business might form a separate subsidiary company for drug discovery. Investments for this

high-risk company might come from the parent company as well as from a few venture capitalists.

This new company would take several years to report profit and all the investors of this new

company understand the business risk. Consolidating the loss reported by the new venture

during the initial years with the parent company, actually defeats the whole purpose of starting

the new company as a separate entity. If the new company is a listed company, it is quite

possible that the new company stocks are selling at a much higher rate compared to the parent

company, even though the new company is posting loss during the initial period.

Another problem that investors face in analyzing CFS is the underlying assumption that all

the assets and liabilities of the consolidated company are controlled by and available to the

parent company, and hence, to its shareholders. This assumption will not accurately reflect

the parents ownership position. CFS combines companies with different operating activities,

capital structures and their different economic characteristics which may make the financial

statements unclear. This is especially problematic with the consolidation of the cash-generating

processes of different divisions. Serious problems in one division can be masked by the strong

cash-generating activities in another. When non-homogeneous subsidiaries are consolidated,

2 Consolidated Financial Statements, Accounting Research Bulletin No. 51 Para 1.


the CFS may result in a different situation. Depending upon the financial characteristics of the

subsidiary, consolidation may result in financial statements that look better or worse than the

actual results (White et al., 2001).

Preparation of CFS Accounting Standards (AS 21) came into effect from the accounting

period commencing from April 1, 2001. Consolidation as per AS 21 needs to be done when

the parent company directly or indirectly holds more than one half of the voting power of an

enterprise or through control of the composition of the BOD in its subsidiaries. The reason

behind India moving from the earlier stand of providing the financial statement of subsidiary

companies to CFS is not clear. There are two possible reasons for this move. One, there is a

significant change in the business environment where subsidiary companies have become an

important component of the organizational structure over the years, thus requiring a change in

disclosure practice. Alternatively, the primary drive for the CFS was mainly to reduce the

difference between the International accounting standards and the Indian accounting standards.

This paper examines the need for deviating from the earlier practice of providing individual

companies report to consolidation. The significance of subsidiary companies operations in

terms of investments, revenue and profitability is studied to understand the need for

consolidation. The rest of the paper is organized as follows. The next section deals with the

review of the accounting aspects of the CFS, which is followed by sample; parent and the

subsidiary analysis using certain parameters; and the conclusion.

Review of the Accounting Aspects of the Consolidated Financial Statements

Consolidations of financial statements presentation are derived from two theoriesthe parent

company theory and the entity theory. Each view is different and they reflect how the

non-controlling interests, the value of assets, liabilities and goodwill are reflected in the financial

statements. In the parent company view, CFS is considered as an extension of the parent

company accounts. As per this view, parent companys interest in the subsidiary is simply

financial in nature and is widely practiced worldwide (Beckman, 1995). The parent company

is considered more important and significant than the subsidiary company. The parent company

consolidates the book value of all of the subsidiarys assets and liabilities and then allocates a

portion of the subsidiarys net book value to the non-controlling shareholders. The parent

portion of the fair market value increment of the assets and goodwill are recognized. The share

of goodwill and fair market value increment of the non-controlling shareholders is not allocated

and not presented in the CFS.

The entity theory suggests that corporate groups are dominant economic constituents and

the consolidated statements are more important for providing information about the group and

the parent company in particular. The entity view recognizes the economic entity as a whole.

The view recognizes that the parent, although not owning 100% of the assets has an effective

control of the entire subsidiary. The concept of control is defined as the capacity to dominate

a decision directly or indirectly, relating to the operating and financial policies of the other

company. In the entity view, the parent includes the full value of the subsidiary in its CFS and

then allocates the non-controlling interest (as a percentage) to minority interest. The minoritys

share of goodwill is also recognized. There is also a proprietary view which consolidates only

the parents portion of assets and goodwill in the CFS. The CFS does not include the portion of

minority interest in the financial statements.


Indian Accounting Standard (AS-21) follows the entity theory with a modification.

The subsidiaries assets and liabilities are taken at the historical cost. The assets and liabilities

are added line by line. The excess of cost to the parent over the parents portion of net-worth

is treated as goodwill. The negative goodwill is taken to the capital reserve. There is no

specific requirement for the treatment of goodwill or negative goodwill. The consolidation

process in the International Financial Reporting Standards (IFRS) is similar to the Indian accounting

standards. However, the assets and liabilities are to be measured at the fair value for the

purpose of arriving at the goodwill. The excess amount paid over the fair value of the assets

taken over will be treated as goodwill. Minority interest also gets presented in the balance

sheet. The US GAAP requires the parent view of consolidation and does not allocate goodwill

that belong to the minority interest.

Prior literature examines various aspects of CFS, primarily, examining the value relevance

of CFS over parent-only financial information. There were hardly any studies examining whether

firms have increasingly been investing in other companies and creating a complex holding

structure, which in turn warrants CFS and then discuss whether CFS adds any value over

alternative financial reporting formats. A review of studies that examined the value relevance

of CFS is provided here. The earliest of studies that examined the parent-only and the CFS

statements is by Francis (1986). This study examined the CFS using UK data and the loss of

information due to consolidation with respect to debt reporting. Several studies in Japan have

examined the relevance of the CFS in the Japanese context as Japan prepares both the CFS and

parent company accounts like in India. A study by Harris et al. (1991) examined the effects of

consolidation in Japan and found no evidence of incremental information content or value

relevance of consolidated data. However, the study concluded that the results could not be

generalized because of inter-firm ownership relations and unique institutional ownership.

More recently, Herrmann et al. (2001) provided evidence to show that while the Japanese

stock market adjusts for the persistence of parent-only earnings in the current stock prices,

it appears to underestimate the subsidiary earnings and concluded that the valuation of subsidiary

earnings is different from that of parent-only earnings. Okuda (2006) examines the relevance

of the CFS in the Japanese context. The study found that, in general, subsidiary Return On

Equity (ROE) news has a greater effect in driving current stock returns than parent-only ROE

news. Their finding thus supported the CFS regulation in Japan. In addition, the study found

that as the subsidiary companies performance is more important as an indicator of consolidated

performance, the market pays greater attention to subsidiary ROE news. Ishikawa (2000) shows

that consolidated earnings are more important than parent-only earnings, in cases where the

ratio of consolidated to non-consolidated figures is high. A study by Niskanen et al. (1998)

shows that consolidated earnings have a significant incremental explanatory power for stock

returns and not the parent-only earnings for Finland companies, suggesting that the CFS improves

the information content.

There is no notable research in the US as the data of the stand alone parent company is not

available. A set of studies deal with the use of affiliates to manage earnings. For example,

subsidiary companies can be used as tools in transfer pricing mechanism or other means where

there is expropriation, i.e., the controlling shareholder benefits from self-dealing transactions

in which profits are transferred to other companies they control. A parent company may use its

dominant relationship over an affiliated company to structure transactions between the two


companies in a way that allows profits to be shifted from the affiliate to the dominant company

or vice versa. Since the value of the dominant company is directly linked to the profitability

and well-being of the entire economic entity, this type of earnings management, may misled

the users of the dominant companys financial statements. However, such transactions between

the parent company and subsidiary can affect the individual earnings, but consolidated earnings

remain unaffected.

The value relevance of CFS is mixed in different countries. There were hardly any studies in

the Indian context on the value relevance of CFS. Before taking up the value relevance issue,

it is important to examine whether there is any major change in the financial statement numbers

of Indian companies, where companies started using subsidiary companies in their operations.

Sample Data

For the purpose of this study companies in the BSE 500 were taken. Data for the years

2003- 2007 were taken from CMIE Database, Prowess and from Capitaline Database. Out of

these, companies with no subsidiary companies (124 companies) and companies that did not

exist (185 companies) for the time period were eliminated. This resulted in 191 sample

companies. For analysis, sales, profit and assets are taken between parent-only and CFS.

Analysis

The average market capitalization of the sample companies was Rs. 10,298 cr as on March

2007. They include both financial and non-financial companies. The sample companies are

from different industries like banking, information technology, pharmaceutical, engineering,

construction automotive, etc. The average promoter holdings in these companies are about

46.35%. There are 26 companies with foreign promoters holding more than 25% shareholding

with an average holding of 45.12%. There are 16 companies with majority shareholding by

government and the balance with Indian promoters and others. The results of the analysis are

discussed below.

Investment in Companies

The need for an additional statement consolidating subsidiaries arises only when a company

invests in the equity of another company. There are several reasons for such an investment by

a company in another company. If the purpose of investment is purely short-term, then the

market value of such investment is reported as additional information. The market value

information helps the investors and others to evaluate the performance of such investments.

The problem arises when such investments are made in subsidiary companies, particularly

those of unlisted subsidiary companies. In other words, as long as investments are made in

listed companies, whether such investments are for short-term purpose or long-term purpose,

the market value of the investment is reasonable and adequate to evaluate the performance of

such investments. If such investments are in unlisted companies, there are two options for

investing companiesto provide the financial statements of such companies where investments

are made or to provide CFS. Table 1 shows the extent of investments in other companies by the

BSE-500 index companies during the last 10 years.

Investments as a percentage of total assets range between 22% to 31.3%. A significant part

of the investment is unquoted, whose market value is not easily ascertainable. Investments in


subsidiary companies are in the range of 7% -12% of the total investment. Investments in

groups range between 1% to 3% of the total assets with an average of 2.26% over the last

Table 1: Investment Component of Total Assets of the Sample Companies (Rs. in crores)

Year Total Assets Investments Investment Marketable

in Group Investments

in Groups

1998 8,13,694.43 18,0021.31 13,763.22 2,910.68

22.12% 7.65% 21.15%

1999 9,39,102.68 2,10,246.78 16,740.15 3,089.13

22.39% 7.96% 18.45%

2000 10,62,154.80 2,58,969.70 23,065.05 5,418.72

24.38% 8.91% 23.49%

2001 12,07,106.20 3,17,104.66 32,522.40 8,880.84

26.27% 10.26% 27.31%

2002 14,23,092.80 4,04,226.54 36,721.51 7,467.1

28.40% 9.08% 20.33%

2003 15,57,687.00 4,65,398.33 44,954.87 11,315.72

29.88% 9.66% 25.17%

2004 16,77,577.00 5,29,454.17 55,315.61 11,056.59

31.56% 10.45% 19.99%

2005 20,37,869.80 5,97,209.95 60,659.34 11,438.65

29.31% 10.16% 18.86%

2006 24,25,395.60 5,97,739.13 59,377.92 10,244.31

24.65% 9.93% 17.25%

2007 29,85,390.20 6,87,216.94 86,787.22 20,318.18

23.02% 12.63% 23.41%

Notes: 1. Figures below investments are investments as a percent of total assets.

2. Figures below investments in group is the percent of investment in groups to total

investments.

3. Figures below marketable investment in groups is the percentage of marketable

investment in group to total investments in the group.

10 years. Although the percentage is small, the absolute amount has gone up from Rs. 9,523

cr to Rs. 58,577 cr, i.e., 515% growth. The average marketable investments in the group is

around 22.19%. This indicates that the size of investments in the subsidiary companies is very

marginal. The market value of quoted investment shows significant volatility. In other words,

had these unquoted investments been made in listed companies, the performance of such

investments would have shown similar volatility. Also, had these unlisted companies actually

listed themselves there would have been a fair chance to believe that the performance of such


companies would have reflected similar volatility. Hence, the practice of companies investing

in unlisted companies makes a case for disclosure about the performance of such investments.

However, there is no significant change in the pattern of investments as a whole, and particularly

on unquoted investments over the last 12 years. Hence, there is no clear case for changing the

practice of providing subsidiary companies financial statements with the reports of auditor

and director and prescribing consolidation.

Number of Subsidiary Companies

In addition to investment values, the number of subsidiary companies would also provide

some justification for a particular method of disclosure. Consolidation would be meaningful

if a company has several subsidiary companies. For instance, a typical multinational company

operates through several subsidiary companies located at different nations but most of them

are in the same line of business. Subsidiary company form of organizational structure is generally

preferred for legal, tax and management control perspectives. In such cases, consolidation

would provide an insight on the overall performance of the company. On the other hand, if

the number of companies were either few or such subsidiary companies are performing different

lines of businesses, consolidation is of limited use. For a company operating in cement,

constructions, machinery, software, chemicals, etc., through subsidiary companies,

consolidation is of limited use in assessing the performance of the companies. Annexure 1

gives some examples of companies and their subsidiaries having different businesses. For

example, Larsen and Toubro, a company in the construction and engineering field also has

subsidiary company in information technology and in the finance sector. Table 2 shows the

frequency distribution on number of subsidiary companies.

Table 2 shows that one-fourth of the sample have no subsidiary companies and another 20%

have just one subsidiary company. Investments in subsidiary companies where the number of

subsidiary companies are large are also

relatively small. For example, there are 41

companies which have more than 10

subsidiary companies. However, the sales

of the subsidiary companies as a

percentage of the total consolidated sales

is about 13.1% and the subsidiary profit

as a percentage of the consolidated profit

is about 8.5%. Annexure 2 lists company

names and the number of subsidiaries they

have for the last category.

Turnover of Subsidiary Companies

The significance of subsidiary company in

terms of turnover is examined. Tables 3

and 4 provide the details of sales of

subsidiary company over the last five years.

Table 3 shows the parent-only and consolidated sales. The contribution of subsidiary company

in total consolidated sales is about 10% during the last five years. The figures are slightly

Table 2: Frequency Distribution of

Subsidiary Companies

No. of Sub. Frequency Percentage

0 124 25

1 99 20

2 59 12

3 51 10

4 32 7

5 32 6

6 19 4

7 17 3

8 14 3

9 5 1

10 7 1

Above 10 41 8

Total 500 100


higher at median level but consistent over the years except in 2007. Standard deviation of sales

between parent-only and consolidated firms has come down over the years. Table 4 shows the

frequency distribution of subsidiary companies sales during the last five years. The percentage

in the frequency is as follows: S = (CS PS)/ CS where the S

is the subsidiary sales; CS is

the consolidated sales and PS is the parent-only sales.

The distribution shows that sales of subsidiary companies are relatively low for a largenumber of sample companies. However, the number of companies, whose subsidiary contributes

Table 3: Sales of Parent-Only and Consolidated Sales

Sales Parent-Only Consolidated Variation % Variation

2007

Mean 6,204.15 6,951.22 747.08 11

Median 1,296.19 1,760.62 464.43 26

Standard Deviation 20,617.84 20,704.53 86.68

2006

Mean 4,823.73 5,380.03 556.30 10

Median 1,037.25 1,247.44 210.19 17


2005

Mean 4,054.57 4,497.30 442.73 10

Median 910.22 1,094.86 184.64 17


2004

Mean 3,295.11 3712.76 417.65 11

Median 729.48 902.74 173.26 19


2003

Mean 2,987.90 3,265.57 277.67 9

Median 649.36 752.22 102.86 14


Table 4: Frequency Distribution of Sales of Subsidiary Companies

Subsidiary Company Sales Range 2007 2006 2005 2004 2003

Less than 0 9 7 7 8 8

0 to 9.99% 95 100 100 106 109

10% to 19.99% 19 28 28 27 31

20% to 29.99% 19 18 18 14 14

Above 30% 49 38 38 36 29

Total 191 191 191 191 191

more than 30% of the sales have increased over the years. In other words, though there is noclear evidence for Indian companies using subsidiary route, the importance of subsidiary


companies have increased for a few companies. One possible reason is increasing overseasacquisition or geographical expansion of Indian companies.

Profit of Subsidiary Companies

If companies start using subsidiaries to manage earnings, then sales may not reflect suchmotives. The next analysis is to study the profits of parent-only and consolidated profits.Table 5 provides the details of profit. The contribution of subsidiary companies on consolidatedprofit is 12% in 2007 and has increased marginally over the last three years. The contributionof subsidiary profits was merely 3% in the year 2003. There is no abnormal change in the

contribution of subsidiary companies on the profit.

Table 5: Profit of Parent-Only and Consolidated Sales

Net Profit Parent-Only Consolidated Variation % Variation

2007

Mean 627.32 712.88 85.55 12

Median 131.53 140.84 9.31 7


2006

Mean 451.73 502.83 51.10 10

Median 83.43 91.50 8.07 9


2005

Mean 411.65 456.35 44.71 10

Median 62.09 70.14 8.05 11


2004

Mean 313.74 349.54 35.80 10

Median 50.63 58.37 7.74 13


2003

Mean 262.59 271.33 8.74 3

Median 38.08 36.37 1.71 5

Standard Deviation 980.86 1,019.22 38.36

Table 6 shows the frequency distribution of profit at different profit ranges. Similar to

sales, in about 50% of the sample companies, the contribution of subsidiary companies on

consolidated profit is less than 10%. However, there is a decreasing trend in the number of

companies whose subsidiary profit is more than 30%.

In the above case, the absolute profits are showing a similar trend as sales. Investors needto estimate the favorable cash flows in the form of dividends or interest, etc., to understandhow the margins affect the relative prices of its securities. In this context, investors motivation


Table 6: Frequency Distribution of Profit of Subsidiary Companies

Range 2007 2006 2005 2004 2003

Less than 0 58.00 54.00 60.00 63.00 83.00

0 to 9.99% 75.00 73.00 66.00 75.00 54.00

10% to 19.99% 21.00 23.00 23.00 14.00 19.00

20% to 29.99% 14.00 12.00 13.00 9.00 8.00

Above 30% 23.00 29.00 29.00 30.00 27.00

Total 191 191 191 191 191

for investment is focused on the financial return they will receive from their investment.For this purpose, understanding the ratio may be useful and comparing them with the CFSratios will give more insights on performance.

The following observations are made towards the ratios. The average return on net assetsin 2007 for the sample parent only numbers is 14.82% while that of the consolidated isslightly less at 14.2%. An earlier study of German companies by Pellens and Linnhoff(1993) found that there was considerable difference between the two statements.Debts were higher and profitability was lower in the consolidated financial statements.Lambert and Zimmer (1996) study using different sample for the German companies indicatedsimilar results. Using Spanish company data similar results were obtained (Abad et al.,1998). In the present sample we find similar results. The average profit margin ratio is about17% as compared to the average consolidated profit margin ratio of 13.8% for the sameyear. For nearly 69% of the companies, the consolidated margin ratio was less than that ofthe parent only margin ratio. Even though the size of the subsidiary company compared tothe parent company is not very high, there is some evidence of subsidiary companies notdoing well and companies using subsidiary companies for managing the earnings. Therefore,there is a need to examine whether the market is able to incorporate such differences in the

price, which apparently is the objective of regulators in insisting consolidation.

Assets of Parent and Subsidiary Companies

The assets distribution in the subsidiary companies is also similar to that of sales and profits

ranges. In more than 60% of the companies, the asset of subsidiary companies comprises of

less than 10% of the total consolidated assets. However, the number of companies in this

group has been reducing and companies in other ranges have gone up. Only 13% of the

sample companies have subsidiary companies contributing to more than 30 % of the consolidated

assets (Table 7).

Table 7: Frequency Distribution of Assets of Subsidiary Companies

Range 2007 2006 2005 2004 2003

Less than 0 29 36 39 43 46

0 to 9.99% 90 90 98 99 95

10% to 19.99% 30 27 21 18 22

20% to 29.99% 18 16 15 17 13

Above 30% 24 22 18 14 15

Total 191 191 191 191 191


Conclusion

Accounting development in countries is a function of several factors. Historical influence,

regulatory environment and culture are some of the factors that influence the accounting

system of a country. There is no clear evidence that business practices of Indian companies

have changed over the years and that Indian companies have started using subsidiary companies

to a great extent. Investments in other companies, investment in unquoted securities, number

of subsidiary companies and contribution of subsidiary companies on sales and profit of

consolidated sales and profits, show reasonable amount of stability over the years. However,

the return and the profitability ratios are lower in the CFS. Consistent with globalization and

the Indian companies expanding their geographical operations, the analysis shows that there is

an increase in the number of companies whose subsidiary sales and profit, as a ratio of

consolidated sales and profit, is at a higher end. Given this minor deviation at this point of

time, one can conclude that the change in disclosure regulations is proactive.

CFS were introduced in 2002 to improve the reporting requirements and for harmonization

with the international accounting standards. Integration of accounting standards and disclosure

practices is a more reasonable argument for the change in regulations. At the same time, the

regulation could consider the nature of subsidiaries and their significance in prescribing the

requirement of consolidation. For example, CFS is of limited use for any analytical purpose

when a company is highly diversified. The diversified business may generate revenue which

may be valued differently. Similarly, if there is a concealment of financial distress or underlying

solvency problem in a subsidiary company, the same will not be reflected. It is presumed

that the subsidiaries statements will generally follow the accounting policies of the parent

company on consolidation. Though segment reporting provides some high level details it

may not be sufficient to draw conclusions regarding the performance of the subsidiary

companies. On the other hand, consolidation will be desirable when a company uses subsidiary

for geographical reasons and all subsidiary companies are by and large performing same kind

of operations.

With this in view, regulators should consider the provision of individual companies financial

statements for more meaningful analysis. This must be made available at least in the websites

of the companies as against writing to the company for the same. At least a statement giving

the amount of income, expenses and the net result of each of the subsidiary company along

with a single page balance sheet would be suitable. Along with this, a list of shareholding

pattern of all the major shareholders of each of the subsidiary company must be given.

A single regulation is easy to administer but not necessarily a right choice. If easyadministration is the criteria, we can reasonably conclude that India has not reached the stagefor any major deviation in the disclosure practices of subsidiary companies operations. However,this conclusion requires further examination on value-relevance of the CFS.


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Company Some Subsidiary Companies

Aditya Birla Nuvo Ltd. Birla Global Finance Co. Ltd.

Birla Insurance Advisory Services Ltd.

Birla Sun Life Insurance Co. Ltd.

Birla Technologies Ltd.

Wipro Chandrika Ltd.Wipro Ltd.Wipro Consumer Care Ltd.

Wipro Healthcare I T Ltd.

Wipro Holdings (Mauritius) Ltd.

Wipro Infrastructure Engg. Ltd.

Wipro Travel Services Ltd.

D C M Shriram Consolidated Ltd. Anant Thermal Energy Ltd.

Bioseed Genetics Vietnam

Bioseed Research India Pvt. Ltd.

D C M Shriram Credit & Investments Ltd.

D C M Shriram Infrastructure Ltd.

D S C L Energy Services Co. Ltd.

Godrej Industries Ltd. Ensemble Holdings & Finance Ltd.

Girikandra Holiday Homes & Resorts Ltd.

Godrej Beverages & Foods Ltd.

Godrej Hicare Ltd.

E I D-Parry (India) Ltd. Coromandel Bathware Ltd.

Coromandel Fertilizers Ltd.

Parry America Inc.

Parry Chemicals Ltd.

Parry Infrastructure Co. Pvt. Ltd.

Parrys Investments Ltd.

Escorts Ltd. C A-Escosoft Ltd.

Cellnext Solutions Ltd.

Escorts Asset Management Ltd.

Escorts Construction Equipment Ltd.

Escorts Securities Ltd.

Escosoft Technologies Ltd.

Idea Telecommunications Ltd.

I T C Ltd.

Larsen & Toubro Ltd.

B F I L Finance Ltd.

Bay Islands Hotels Ltd.

I T C Infotech India Ltd.

Wimco Ltd.

Reliance Industries Ltd.

Andhra Pradesh Expositions Pvt. Ltd.

Bhilai Power Supply Co. Ltd.

G D A Technologies Inc.

L & T Finance Ltd.

L & T Infotech Ltd.

Ranger Farms Pvt. Ltd.

Reliance Dairy Foods Ltd.

Reliance Haryana S E Z Ltd.

Reliance Retail Ltd.

Reliance Retail Insurance Broking Ltd.

Retail Concepts & Services (India) Pvt. Ltd.

Annexure 1


Annexure 2

1 Akruti Nirman Ltd. 12

2 Bank of Baroda 11

3 Bharti Airtel Ltd. 13

4 Cambridge Solutions Ltd. 19

5 D L F Ltd. 54

6 Dalmia Cement (Bharat) Ltd. 23

7 Dr. Reddys Laboratories Ltd. 16

8 Essel Propack Ltd. 20

9 Gitanjali Gems Ltd. 12

10 Glenmark Pharmaceuticals Ltd. 13

11 Gokaldas Exports Ltd. 13

12 H C L Technologies Ltd. 29

13 Hindalco Industries Ltd. 18

14 Housing Development Finance Corpn. Ltd. 13

15 I C I C I Bank Ltd. 13

16 I T C Ltd. 11

17 I V R C L Infrastructures & Projects Ltd. 12

18 Kotak Mahindra Bank Ltd. 13

19 Larsen & Toubro Ltd. 14

20 Mahindra & Mahindra Ltd. 23

21 Pantaloon Retail (India) Ltd. 11

22 Polaris Software Lab Ltd. 11

23 Punj Lloyd Ltd. 13

24 Ranbaxy Laboratories Ltd. 16

25 Raymond Ltd. 11

26 Reliance Capital Ltd. 12

27 Reliance Industries Ltd. 13

28 State Bank of India 16

29 Sun Pharmaceutical Inds. Ltd. 11

30 Suzlon Energy Ltd. 19

31 Tata Consultancy Services Ltd. 18

32 Tata Motors Ltd. 13

33 Tata Steel Ltd. 12

34 Teledata Informatics Ltd. 12

35 Unitech Ltd. 54

36 United Breweries (Holdings) Ltd. 11

37 United Spirits Ltd. 16

38 Videocon Industries Ltd. 11

39 Videsh Sanchar Nigam Ltd. 13

40 Wipro Ltd. 11

41 Zee Entertainment Enterprises Ltd. 11

Company Names Number of SubsidiariesSl. No.

Reference # 09J-2008-07-02-01

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