ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): , , HOLDING COMPANIES

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1 : ACCOUNTING SOLUTIONS HOLDING COMPANIES When a company acquires majority of shares in the ownership or is in a position to control the management of the other company, the company is called a holding company and the other is called a subsidiary company. A holding company is able to exercise control over the management of other companies is to promote combination movement so that competition may be eliminated, also advantages of monopoly or near monopoly may be enjoyed and economics in management and production may be secured. Under the following circumstances a company can become a subsidiary to other company: (i) If a company acquires all or majority of equity shares in other company (ii) If the other company controls the management or the composition of its Board of directors (iii) If the company becomes a subsidiary of another company which itself is a subsidiary of a third company. Consolidated Profit and Loss Account Consolidated Profit and Loss account is prepared to show the profits of the group so that shareholder may be able to know the profits of the company in which they have made the investment. Format of Consolidated Trading & Profit & Loss Account CONSOLIDATED TRADING AND PROFIT AND LOSS ACCOUNT H LTD. AND ITS SUBSIIARY S LTD. Particulars H Lt d. S Ltd Adjustment Particular s H Lt d. S Ltd. Adjustment Steps to Prepare Consolidated Profit & Loss Account: 1. Calculate separately the profit & Loss of holding 7 subsidiary company in the usual manner by putting all items of income and gains on the credit side and all items of all expenses & losses on the debit side. (1)

2 2. Make adjustments for the following amounts calculated on the basis of the profits disclosed: (i) Amount of holding company share of profits of the subsidiary company arising before the date of acquisition of shares should be debited to consolidated P & L A/c and credited to capital reserve or cost of control or goodwill as the case may be and vice-versa in case of a loss. (ii) Minority Shareholders share of all profits of the subsidiary company should be credited to Minority Interest Account and debited to consolidate P & L A/c and reverse in case of Loss. (iii) The amount of stock reserve should be shown on the debit side of consolidated P & l A/c by corresponding credit to the stock Reserve Account. (a) Issue of Bonus Shares by the : Treatment of issue of bonus shares by the subsidiary company will depend upon the source from which the bonus shares are issued. Bonus Shares may be issued out of pre acquisition profits or reserves or post acquisition profits or reserves of the subsidiary company. (i) Treatment of issue of Bonus Shares out of Pre-acquisition Profits: Issue of bonus shares out of pre acquisition profits or reserves will have no effect on the consolidated Balance Sheet. It is so because holding company s share in pre acquisition profits is reduced on account of issue of bonus shares and on the other hand paid-up value of shares held by holding company increases. So soct of Goodwill and minorities interest will remain the same as these were before the issue of bonus share. (ii) If the Bonus Shares are issued out of Post acquisition profits: Issue of bonus shares out of post acquisition profits will have effect on the consolidated Balance Sheet. The share of holding company shall reduce in revenue profits and the paid up value of shares held by the holding co. Will increase. Increased paid up value of shares held will reduce the cost of control or Goodwill or increase the value of capital reserve. (b) Preference Shares of the Held by the : There is a treatment for the preference shares of the subsidiary company held by the holding company, whether the same are held either wholly or partly. The accounting treatment in the consolidated balance Sheet is as follows. Firstly the preference dividend accrued shall be deducted from the profits and the accrued preference dividend is apportioned between minority shareholders and holding company in proportion to holding. The remaining profits are divided among equity sharehold ers in accordance with the shares held by them. If there are losses for the current year of subsidiary company then no preference dividend is provided for. (2)

3 Secondly while calculating minority interest, the paid up value of preference shares held by them shall be added to their share. Thirdly the excess amount paid by the holding company for acquiring preference shares over the paid up value is treated as cost of control. (c) Payment of Dividend by the Subsidiary Co. Payment of dividend to the shareholders by the subsidiary co. Is made out of pre acquisition profits as well as post acquisition profits. It has different accounting treatments as the source out of which the dividend is given is different. It may be noted that in the absence of information whether dividend has been declared out of pre acquisition or post acquisition profits, it is assumed that dividend is out of profits for the year for which the dividend is declared. (i) Payment of dividend from the pre acquisition profits: Dividends received out of capital of the subsidiary company. Dividends received by the holding Co. Is credited to investment in shares of the subsidiary account thereby reducing the cost of control or increasing capital reserve. The following entry is passed by the holding company to record the receipt: Bank A/c Dr. To Investment A/c (ii) (iii) Payment of Dividend from the post acquisition profits: Dividends received out of revenue profits of the subsidiary company by holding co.is being treated as income. The following entry is passed by the holding to record the receipt. Bank A/c Dr. To Dividend from subsidiary co. Payment of Dividend Partly from capital profits and partly out of revenue profits: The dividend received is divided into two parts in proportion to its declaration out of capital profits and revenue profits. (d) Common Transactions between the Holding and the : There also exist some business dealings in holding company and subsidiary company. In preparing consolidated Balance Sheet, common transaction appearing in both the Balance Sheet of the holding and the Subsidiary company should be eliminated (3)

4 Consolidated Balance sheet of and Its Subsidiary Liabilities Rs. Assets Rs. Share Capital Reserves opening Creditors Bills Payable Fixed Assets: Goodwill Land & Building Plant & Machinery Furniture & Fixtures Stock Sundry Debtors Bank Balances (4)

5 Working Notes: ACCOUNTING SOLUTIONS 1. Analysis of capital Profit Balance of reserve Add: Balance of P&L Account Profit x no of months/12 Less: Holding company share 2. Analysis of Revenue Profit Profits according to the months Less: Share 3. Calculation of Goodwill or Cost of Control Cost of Investments Less: Paid up value of shares Capital Profits Goodwill 4. Balance of Profit & loss A/c of holding Company Balance as per balance sheet Add: Revenue Profits Steps to be followed in Holding Companies Accounting: Step 1: Calculate the ratio of the equity shares held by the H Ltd. And Outsiders in S Ltd. As their Investment Step 2: Calculation of period prior to the date of acquisition of shares by H Ltd in S Ltd. And period post to the date of such acquisition. Step 3: Calculation of pre acquisition or capital profit of S Ltd. Balance of profit & loss A/c in the beginning of the year General reserve or other reserve as in the beginning of the year Current year s profits for the pre-acquisition period Add: Increase in the value of fixed assets of S Ltd Less: Decrease in the value of Fixed Assets in S Ltd. Less: amount of Bonus shares issued by S Ltd. (out of pre-acquisition Period) Less: Fictitious assets of S Ltd. To be written off Capital Profit or Pre acquisition profit or loss (5)

6 Step 4: Calculation of Post Acquisition or Revenue Profit of S Ltd. Current Year s profits for the post acquisition period Less: Amount of bonus issue by S Ltd out of acquisition profits Add: Depreciation on decrease in the value of fixed assets for post acquisition period Less: Depreciation on increase in the value of fixed assets for post acquisition period Revenue Profit or Loss Step 5: Calculation of Cost of Control or Goodwill or Capital Reserve Amount Invested by H Ltd. In S Ltd. Less: Face value of equity share held by H Ltd in S Ltd Less: Face Value of Preference Share held by H Ltd. In S Ltd. Less: Proportionate shares of H Ltd. In capital profits of S Ltd. Less: Proportionate shares of H Ltd. In Bonus Issue Goodwill or Capital Reserve Step 6: Calculation of minority Or Outsiders interest Face value of equity shares in S Ltd. Held by others Face value of preference Shares in S Ltd. Held by outsiders Dividend on preference shares held by the outsiders Proportionate share of outsiders in capital profits Proportionate share of outsiders in revenue profits Proportionate share of outsiders in Bonus issue Value of Minority Interest Step 7: calculation of balance of profit & Loss Account of H Ltd. Balance of Profit & Loss A/c of H Ltd as per its Balance Sheet Add: Proportionate share of h Ltd. In revenue profits Less: Unrealised profits on unsold stock Balance of Profit & Loss A/c of H Ltd. (6)