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8/3/2019 Ppt on Holding Co.
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A form of CorporateRestructuring
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A company controlling partial or completeinterest in another company.
Corporation that owns enough voting stock
in another corporation to influence its board ofdirectors and therefore to control its policiesand management.
(Atleast 80% of voting stock to gain thebenefits of tax consolidation which include tax-free dividends )
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Ability to control sizeable operations withfractional ownership and small investment.
Take risks through subsidiaries with liabilitylimited to the subsidiary corporation.
Reduces the risk of parent company.
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Partial multiple taxation when less than 80% ofa subsidiary is owned.
Special state and local taxes.
The risk of forced divestiture.
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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 andits subsidiaries should be combined on line-by-line
basis by adding together like items of assets,
liabilities income and expenses.
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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 financialstatement.
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.
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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.
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If the financial statement of the subsidiary are not
available, financial statement for the subsidiaries for
the immediately preceding period are used as thebasis 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.
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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 intoexistence.
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control is intended to be temporary because thesubsidiary is acquired and held exclusivelywith a view to its subsequent disposal in the
near future. It operates under severe long term restrictions
which significantly impair its ability to transferfunds to the parent.
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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.
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A Minority interest is the proportion of the
subsidiary companys net assets/shareholders fundwhich belong to the minority shareholders.
The value of the Minority interest is the portion ofthe share capital and reserves at the date when the
holding company acquires its controlling interest
and the share of income after acquisition.
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A Ltd. Acquired 80 percent of the shares of B Ltd. ForRs. 40,000. The balance sheet of the two companies
are as under:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share Capital(Rs. 10)
Long term liability
Current liabilities
2,00,000
40,000
60,000
50,000
-------
20,000
Fixed Assets
Investment4,000
Shares in B Ltd. At
par.
Current assets
1,90,000
40,000
70,000
40,000
-------
30,000
3,00,000 70,000 3,00,000 70,000
Prepare a consolidated balance sheet.
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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.: 70,00020,000 = 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.
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The consolidated balance sheet of A Ltd. And itssubsidiary B Ltd.
Liabilities Amount Assets Amount
Share capital( Rs. 10)
Long term liability
Current liabilities
Minority interest
2,00,000
40,000
80,000
10,000
Fixed Assets:
(1,90,000 + 40,000)
Current assets:
(70,000 + 30,000)
2,30,000
1,00,000
3,30,000 3,30,000
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Minority interestis not the liability but capital of the
group which does not belong to the shareholders of
the holding company.
Minority interestis always calculated at the date of
the consolidated balance sheetnot when theholding company takes the control.
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When the value of Investment in Subsidiary inthe holding companys balance sheet is morethan the book value of the net assets acquired,
the difference represents Goodwill on
Consolidation.
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H ltd. Acquired 80% of the shares of S ltd. For Rs.48,000. thebalance sheet of two co. are as under:-
Liabilities H ltd. S ltd. Assets H ltd. S ltd.
Share capital(Rs.10)
2,00,000 50,000 Fixed assets 1,90,000 40,000
Long termliability
40,000 - Investment4000 share@10each
48,000 -
Currentliabilities
60,000 20,000 Current Assets 62,000 30,000
3,00,000 70,000 3,00,000 70,000
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Liabilities Amount Assets Amount
Share capital(Rs.10)
2,00,000 Goodwill 8,000
Long term liability 40,000 Fixed assets(1,90,000+40,000)
2,30,000
Current liabilities 80,000 Current Assets(62,000+30,000)
92,000
Minority interest
(20% of 50,000)
10,000
3,30,000 3,30,000
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When Holding company purchases the shares ofsubsidiary company at any time during thefinancial year, then the year is divided into two
parts Pre-acquisition period
Post-acquisition period
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General Reserve
Capital Reserve
Profit for the current year
The portion of these, for the period prior topurchase is treated as capital profit for the
Holding company
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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 foracquisition of shares in order to ascertain goodwill/capital reserve.
Holding companys share of the same should also be deducted from consolidatedprofit.
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.
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Proposed dividend already shown in the B/S of the subsidiarycompany:
The amount of proposed dividend must be added with current profits.
Minoritys share should be deducted from minoritys interest, which will appearagain separately as a liability.
Proposed dividend recommended by the subsidiary companybut not yet given effect in the accounts:
Simply minoritys share of the proposed dividend should be deducted fromminoritys interest, which will appear again separately as a liability in theconsolidated B/S.
Preference share dividend due:
The amount of preference share dividend, which is due, must be appropriated fromthe 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.
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Share premium:
When holding company purchases the share of subsidiary company at a premiumthen 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-acquisitionperiod.
Share of holding company in the funds of subsidiary company for the pre-acquisitionperiod.
Share of holding company in the profit of subsidiary company for the pre-acquisition
period.Less:
Purchase price of shares of holding company.
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Contingent liability is the liability whichmay or may not happen. It is customary to
show contingent liabilities as a foot note tothe balance sheet.
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CONTINGENT LIABILITY is:(a) a possible obligation that arises from past events and theexistence of which will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events notwholly within the control of the enterprise; or(b) a present obligation that arises from past events but is notrecognized because:(i) it is not probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation;
or(ii) a reliable estimate of the amount of the obligation cannotbe made.
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Contingent liability may be of two types:
a) External contingent liability:-this is on
account of a transaction between thecompany & the third party.
b) Internal contingent liability:-this is onaccount of a transaction between thecompanies of the same group.
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While preparing the consolidated balancesheet the external contingent liabilities are
shown as a footnote to the balance sheetwhile the internal contingent liabilities areeliminated from the footnote since theyappear as actual liabilities in the
consolidated balance sheet.
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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 bereflected 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 inSubsidiary 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 onvalue of goodwill or capital reserve will be increased.
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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
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The following are the Balance Sheets of R Ltd & S Ltd. As on 31.12.2006:
(figures in Rs.)
Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.
Equity Share
of Rs 10 each
Profit & Loss
A/C
ExternalLiabilities
4,00,000
50,000
7,50,000
1,00,000
20,000
4,80,000
Equipment
Investment :
9,000 Equity
Shares in S Ltd
On 1.1 2006Current Assets
2,50,000
1,40,000
8,10,000
95,000
5,05,000
12,00,000 6,00,000 12,00,000 6,00,000
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On January 1, 2006, Profit & Loss A/C of S Ltd showed acredit 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
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Liabilities Rs Assets Rs
Share Capital:
Equity Shares of Rs 10
each
Reserves & Surplus:
Profit & Loss A/c
Current Liabilities:
External Liabilities
Minority Interest
4,00,000
59,900
12,30,000
13,900
Fixed Assets:
Goodwill
EquipmentCurrent Assets
24,800
3,64,00013,15,000
17,03,800 17,03,800
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1) Degree of Control = 9,000 Shares / 10,000 Shares = 9/10th;
Minority Interest = 1/10
2) Capital Profit R ltd S ltd
Pre-acquisition profit 8,000
Revaluation Profit 20,000
(1,20,0001,00,000) -----------28,000 25,200 2,800
3) Post-acquisition Profit
Profit as per Balance Sheet 20,000
- Pre-acquisition profit 8,000
- Depreciation 1,000----------
11,000 9,900 1,100
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R ltd S ltd4) Share Capital 1,00,000
- Minority Interest 10,000 10,000
( 1/10) --------------90,000
Adjusted in Calculation of
Goodwill/ capital Reserves 90,000
Minority Interest 13,900
Calculation of Goodwill/Capital Reserve
Cost of Investments 1,40,000
- Capital Profit 25,200
- Face Value of Shares held 90,000 1,15,200
--------------
Goodwill 24,800
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Particular Equipment Current
Assets
External
Liabilities
Profit &
loss
R LtdS Ltd
+ Revaluation Profit
- Depreciation
2,50,00095,000
3,45,000
20,0003,65,000
1,000
8,10,0005,05,000
7,50,0004,80,000
50,0009,900
3,64,000 13,15,000 12,30,000 59,900
Depreciation :5000/1,00,000 * 100 = 5%,
1,20,000* 5% = 6,000
Difference = 6,000 5,000 = 1,000
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Profit earned by the subsidiary company beforethe holding company acquires its control.
To be considered for calculation of goodwill orcapital reserve
It is split between cost of control and minority
interest
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Profits earned by the subsidiary company afterthe holding company acquire its control.
Not to be considered in the calculation ofgoodwill or capital reserve
Is apportioned between holding company and
minority shareholders.
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At the time of consolidation, inter-companydebts 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 balancesheet as a footnote at their face value.
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At the time of preparing consolidated balancesheet, loans and advances recorded in thecurrent account are to be cancelled out.
Differences in the two accounts usually causedby goods-in-transit or cash-in-transit is shownin the consolidated balance sheet as one of theassets.
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Liabilities H Ltd. S Ltd. Assets HLtd. S Ltd.
Sharecapital(Rs.10each)
P/L a/cGeneral reserve
Creditors:
External
H ltd.
50000
1000012000
11000
-
40000
60004000
5000
2900
Fixed assets
Debtors
external
S Ltd.Cash at bank
Shares in S ltd.
(3000 shares)
Goods in transitStock
Other investments
20000
9000
30005500
32000
6004000
8900
30000
5000
-1900
9000
12000
TOTAL 83000 57900 83000 57900
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The credit balance of P/L A/c of S Ltd. at the dateH Ltd. bought its shares was Rs. 2000 andgeneral reserve stood at nil.on 31stdec01,therewere goods-in-transit from HlLtd to S Ltd.Rs.600 and cash in transit Rs.100 from S Ltd. ToH Ltd.
Prepare the consolidated balance sheet as at 31stdec01.
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Working Notes:
1) Degree of control 3000/4000=3/4th
Minority=1/4th
Particulars Total H Ltd.sshare
Minorityinterest
Capital profit
Revenue profitProfit as per B/S 6000
Less:capital profit (2000)
Post-acquisition G/R
Share capital
2000
4000
4000
40000
1500
3000
3000
30000
500
1000
1000
10000
12500
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Calculation of Goodwill:
Cost of investment 32000Less: capital profit 1500
Less:face value of shares held 30000
Goodwill 500
Consolidated balance sheet of H Ltd. and S Ltd. as
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Consolidated balance sheet of H Ltd. and S Ltd. ason 31stDec01
Liabilities Rs. Assets Rs.Equity share capital
(Rs.10 each)
General
reserve(12000+3000)P/L A/C(10000+3000)
Creditors(11000+5000)
Minority interest
50000
1500013000
16000
12500
Goodwill
Fixed assets(20000+30000)
Investments(8900+12000)
Stock in transitStock (4000+9000)
Debtors (9000+5000)
Cash in transit
Cash at bank (5500+1900)
500
50000
20900
60013000
14000
100
7400
Total 106500 106500
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CONSOLODATED P&L A/c is prepared toshow the PROFIT of the group so that theshareholders maybe able to know the profits of
the company in which they have made theinvestments
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Transfer of goods within the group should beeliminated, so consolidated p&l a/c eliminatedpurchases 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/cConsolidated P&L A/c.Dr.
To stock Reserve a/c
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Interest on debentures and dividends receivedby the holding co. from the subs. Co.(or viceversa) is eliminated from the consolidated p&la/c
No adjustment is required for tax on dividendsor on interest on debentures because thepayment of tax is to be made to the outsiders.
For the share of profit of holding Co. in the pre-acquisition profit of subs. Co. then the record ismade as :
Consolidated p&l a/c.Dr.To capital reserve a/c
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Share of profit of minority shareholders in theprofit 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 forredemption of preference shares is debited toconsolidated 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
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PARTICULARS H.
ltd
S.
ltd
Adjust Total PARTICULARS H.
ltd
S.
ltd
Adjust Total
To purchase
To cost of goodssold
To gross profit
To generalexpenses
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 dividendrecd
By bal b/d
Consolidated Trading and P&L a/c of H.LTD and its subsidiary S.LTDFor the year ending ..
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Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.
Share Capital: Fixed Assets 500000240000Equity Shares of Rs 10 each Investments infully paid 400000 150000 15000 E. Shares in
General Reserve 50000 40000 SLtd. On 1.1.2001 200000-----P&L Ac. 30000 25000 Current Assets12% Debentures 200000 --- (including Rs10000Current Liabilities and stock-in-tradeProvisions 320000 285000 purchased from
RLtd) 300000
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Particulars Fixed Assets C.Assets C.Liabilities G.ReserveP&LAc.
R Ltd. 500000 300000 320000 50000 30000
S Ltd. 240000 260000 285000 15000 15000
560000 605000 65000 45000
Less :Unrealised
Profit on Stock 2000 2000
740000 558000 605000 65000 43000
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Unrealised profit on stock = 25/125X Rs10000
= Rs 2000.
RLtd. is holding 100% equity shares of
SLtd.Therefore, the entire amount of Rs 2000 isto be provided for unrealised profit.
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A member company may transfer fixed assetsor stock which becomes fixed assets of thetransferee company at a profit. In this case , a
similar problem arises as that seen inconnection with trading stock transfer. At thetime consolidation , unrealised profit should bdeducted from consolidated profit as well as
aggregate value of fixed assets.
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Bonus share out of the profit of pre acquisitionperiod:-
No adjustment is made in consolidated account.
Bonus share out of the profit of post
acquisition period:-
Investment a/c Dr xxx
To capital reserve a/c xxx
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Purchases consideration > (face value of shares + capital
profit)
Difference will be added to goodwill
Purchases consideration < (face value of shares + capitalprofit)
Difference will be added to capital reserve
Dividend on pref. shareProfit 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
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Dividend of pref. share belonging to minority shareholder is added in finding out their interest.
If the holding co. has not purchased pref. shares thensuch share holders will be included in minority
interest.
Ex. The holding co. purchased 7500 10%pref. shares of Rs 10 each ofsubsidiary co. and the total 10% pref. share of subsidiary co. is10000
The balance of minority interest is 20000
Total minority interest will be :
Opening balance 20000
Add: dividend 250022500
Add : pref. share not taken by holding co. 25000closing balance of minority interest 47500
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If shares are purchased in two or more blocksthen it is said as purchase of shares ininstalment.
Division of profit between pre and postacquisition will depend upon the lots in whichshares are purchased.
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It will be appropriate to follow a step by stepsystem for analysing the profits between capitaland revenue.
For ex. If the shares are purchased in three
instalments then share of profit should becalculated individually for each installment.
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