ICAI Notes- Unit 1: Accounting Standards for Consolidated Financial Statements | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
10 
 
 
 
ACCOUNTING STANDARDS 
FOR CONSOLIDATED  
FINANCIAL  
STATEMENTS  
 
UNIT 1 ACCOUNTING STATDARD  21 
CONSOLIDATED FINANCIAL STATEMENTS 
 
 
 
After studying this chapter, you will be able to: 
? Understand the concepts of Group, holding company and subsidiary 
company. 
? Apply the consolidation procedures for consolidation of financial 
statements of subsidiaries with the holding companies. 
? Prepare the consolidated financial statements and solve related 
problems 
  
© The Institute of Chartered Accountants of India
Page 2


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
10 
 
 
 
ACCOUNTING STANDARDS 
FOR CONSOLIDATED  
FINANCIAL  
STATEMENTS  
 
UNIT 1 ACCOUNTING STATDARD  21 
CONSOLIDATED FINANCIAL STATEMENTS 
 
 
 
After studying this chapter, you will be able to: 
? Understand the concepts of Group, holding company and subsidiary 
company. 
? Apply the consolidation procedures for consolidation of financial 
statements of subsidiaries with the holding companies. 
? Prepare the consolidated financial statements and solve related 
problems 
  
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.2 
 
 
 
Note: As per the syllabus, the unit covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of Interest in Subsidiary at Different Dates, Cross holding, Disposal of 
a Subsidiary and Foreign Subsidiaries.  
 1.1 CONCEPT OF GROUP, HOLDING COMPANY 
AND SUBSIDIARY COMPANY 
In an era of business growth, many organizations are growing into large 
corporations by the process of acquisition, mergers, gaining control by one 
company over the other company, restructuring etc.  Acquisitions and mergers 
ultimately lead to either cost reduction or controlling the market or sharing the 
material supplies or product diversification or availing tax benefits or synergy. 
Concept of 
Group, 
Holding 
Company 
and 
Subsidiary 
Company
Purpose and 
method of 
preparing 
consolidated 
financial 
statements
Components 
of 
Consolidated 
Financial 
Statements
Calculation 
of Goodwill/
Capital 
Reserve
Minority 
Interests;  
Profit or 
Loss of 
Subsidiary 
Company
Elimination of 
Intra-Group 
Transactions and 
other 
Adjustments
 UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
10 
 
 
 
ACCOUNTING STANDARDS 
FOR CONSOLIDATED  
FINANCIAL  
STATEMENTS  
 
UNIT 1 ACCOUNTING STATDARD  21 
CONSOLIDATED FINANCIAL STATEMENTS 
 
 
 
After studying this chapter, you will be able to: 
? Understand the concepts of Group, holding company and subsidiary 
company. 
? Apply the consolidation procedures for consolidation of financial 
statements of subsidiaries with the holding companies. 
? Prepare the consolidated financial statements and solve related 
problems 
  
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.2 
 
 
 
Note: As per the syllabus, the unit covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of Interest in Subsidiary at Different Dates, Cross holding, Disposal of 
a Subsidiary and Foreign Subsidiaries.  
 1.1 CONCEPT OF GROUP, HOLDING COMPANY 
AND SUBSIDIARY COMPANY 
In an era of business growth, many organizations are growing into large 
corporations by the process of acquisition, mergers, gaining control by one 
company over the other company, restructuring etc.  Acquisitions and mergers 
ultimately lead to either cost reduction or controlling the market or sharing the 
material supplies or product diversification or availing tax benefits or synergy. 
Concept of 
Group, 
Holding 
Company 
and 
Subsidiary 
Company
Purpose and 
method of 
preparing 
consolidated 
financial 
statements
Components 
of 
Consolidated 
Financial 
Statements
Calculation 
of Goodwill/
Capital 
Reserve
Minority 
Interests;  
Profit or 
Loss of 
Subsidiary 
Company
Elimination of 
Intra-Group 
Transactions and 
other 
Adjustments
 UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ACCOUNTING STANDARD FOR CONSOLIDATED 
FINANCIAL STATEMENTS  
 
    
 
10.3 
 
Whatever the motto behind these ventures is, the ultimate result is the large-scale 
corporation. Formation of holding company is the most popular device for 
achieving these objectives. 
Group of Companies 
Many a time, a company expands by keeping intact its separate corporate 
identity. In this situation, a company (i.e. holding company) gains control over the 
other company (subsidiary company). This control is exercised by one company 
over the other by-  
1.  Purchasing specified number of shares i.e. ownership through voting power 
of that company or  
2.  Exercising control over the board of directors.  
The companies connected in these ways are collectively called as a Group of 
Companies. 
Holding Company and Subsidiary Company have also been defined in Section 2 
of the Companies Act, 2013. 
Holding company 
As per 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. 
It may be defined as one, which has one or more subsidiary companies and 
enjoys control over them. Legally a holding company and its subsidiaries are 
distinct and separate entities. However, in substance holding and subsidiary 
companies work as a group. Accordingly, users of holding company’s accounts 
need financial information of subsidiaries also to understand the performance 
and financial position of the group (i.e. holding company and subsidiaries on a 
consolidated basis). 
Subsidiary Company 
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a 
company in which the holding company - 
(i)  controls the composition of the Board of Directors; or 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
10 
 
 
 
ACCOUNTING STANDARDS 
FOR CONSOLIDATED  
FINANCIAL  
STATEMENTS  
 
UNIT 1 ACCOUNTING STATDARD  21 
CONSOLIDATED FINANCIAL STATEMENTS 
 
 
 
After studying this chapter, you will be able to: 
? Understand the concepts of Group, holding company and subsidiary 
company. 
? Apply the consolidation procedures for consolidation of financial 
statements of subsidiaries with the holding companies. 
? Prepare the consolidated financial statements and solve related 
problems 
  
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.2 
 
 
 
Note: As per the syllabus, the unit covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of Interest in Subsidiary at Different Dates, Cross holding, Disposal of 
a Subsidiary and Foreign Subsidiaries.  
 1.1 CONCEPT OF GROUP, HOLDING COMPANY 
AND SUBSIDIARY COMPANY 
In an era of business growth, many organizations are growing into large 
corporations by the process of acquisition, mergers, gaining control by one 
company over the other company, restructuring etc.  Acquisitions and mergers 
ultimately lead to either cost reduction or controlling the market or sharing the 
material supplies or product diversification or availing tax benefits or synergy. 
Concept of 
Group, 
Holding 
Company 
and 
Subsidiary 
Company
Purpose and 
method of 
preparing 
consolidated 
financial 
statements
Components 
of 
Consolidated 
Financial 
Statements
Calculation 
of Goodwill/
Capital 
Reserve
Minority 
Interests;  
Profit or 
Loss of 
Subsidiary 
Company
Elimination of 
Intra-Group 
Transactions and 
other 
Adjustments
 UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ACCOUNTING STANDARD FOR CONSOLIDATED 
FINANCIAL STATEMENTS  
 
    
 
10.3 
 
Whatever the motto behind these ventures is, the ultimate result is the large-scale 
corporation. Formation of holding company is the most popular device for 
achieving these objectives. 
Group of Companies 
Many a time, a company expands by keeping intact its separate corporate 
identity. In this situation, a company (i.e. holding company) gains control over the 
other company (subsidiary company). This control is exercised by one company 
over the other by-  
1.  Purchasing specified number of shares i.e. ownership through voting power 
of that company or  
2.  Exercising control over the board of directors.  
The companies connected in these ways are collectively called as a Group of 
Companies. 
Holding Company and Subsidiary Company have also been defined in Section 2 
of the Companies Act, 2013. 
Holding company 
As per 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. 
It may be defined as one, which has one or more subsidiary companies and 
enjoys control over them. Legally a holding company and its subsidiaries are 
distinct and separate entities. However, in substance holding and subsidiary 
companies work as a group. Accordingly, users of holding company’s accounts 
need financial information of subsidiaries also to understand the performance 
and financial position of the group (i.e. holding company and subsidiaries on a 
consolidated basis). 
Subsidiary Company 
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a 
company in which the holding company - 
(i)  controls the composition of the Board of Directors; or 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.4 
(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:  
A company shall be deemed to be a subsidiary company of the holding company 
even if there is indirect control through the subsidiary company (ies). 
The control over the composition of a subsidiary company’s Board of Directors 
means exercise of power to appoint or remove all or a majority of the directors of 
the subsidiary company. 
Section 19 of the Companies Act, 2013 prohibits a subsidiary company from 
holding shares in the holding company.  According to this section, no company 
shall, either by itself or through its nominees, hold any shares in its holding 
company and no holding company shall allot or transfer its shares to any of its 
subsidiary companies and any such allotment or transfer of shares of a company 
to its subsidiary company shall be void. 
However, a subsidiary may continue to be a member of its holding company 
when  
(a)  the subsidiary company holds such shares as the legal representative of a 
deceased member of the holding company; or 
(b)  the subsidiary company holds such shares as a trustee; or 
(c)  the subsidiary company is a shareholder even before it became a subsidiary 
company of the holding company.   
The subsidiary company shall have a right to vote at a meeting of the holding 
company only in respect of the shares held by it as a legal representative or as a 
trustee, as mentioned above in point (a) and (b). 
Applicable Accounting Standard 
Accounting Standard (AS) 21: Consolidated Financial Statements provides 
guidance on preparation of Consolidated Financial Statements, the purpose of 
which is discussed in Para 3 below.  
This Standard came into effect in respect of accounting periods commenced on 
or after 1-4-2001.  AS 21 lays down principles and procedures for preparation and 
presentation of consolidated financial statements. Consolidated financial 
statements are presented by the parent (holding company) to provide financial 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
10 
 
 
 
ACCOUNTING STANDARDS 
FOR CONSOLIDATED  
FINANCIAL  
STATEMENTS  
 
UNIT 1 ACCOUNTING STATDARD  21 
CONSOLIDATED FINANCIAL STATEMENTS 
 
 
 
After studying this chapter, you will be able to: 
? Understand the concepts of Group, holding company and subsidiary 
company. 
? Apply the consolidation procedures for consolidation of financial 
statements of subsidiaries with the holding companies. 
? Prepare the consolidated financial statements and solve related 
problems 
  
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.2 
 
 
 
Note: As per the syllabus, the unit covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of Interest in Subsidiary at Different Dates, Cross holding, Disposal of 
a Subsidiary and Foreign Subsidiaries.  
 1.1 CONCEPT OF GROUP, HOLDING COMPANY 
AND SUBSIDIARY COMPANY 
In an era of business growth, many organizations are growing into large 
corporations by the process of acquisition, mergers, gaining control by one 
company over the other company, restructuring etc.  Acquisitions and mergers 
ultimately lead to either cost reduction or controlling the market or sharing the 
material supplies or product diversification or availing tax benefits or synergy. 
Concept of 
Group, 
Holding 
Company 
and 
Subsidiary 
Company
Purpose and 
method of 
preparing 
consolidated 
financial 
statements
Components 
of 
Consolidated 
Financial 
Statements
Calculation 
of Goodwill/
Capital 
Reserve
Minority 
Interests;  
Profit or 
Loss of 
Subsidiary 
Company
Elimination of 
Intra-Group 
Transactions and 
other 
Adjustments
 UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ACCOUNTING STANDARD FOR CONSOLIDATED 
FINANCIAL STATEMENTS  
 
    
 
10.3 
 
Whatever the motto behind these ventures is, the ultimate result is the large-scale 
corporation. Formation of holding company is the most popular device for 
achieving these objectives. 
Group of Companies 
Many a time, a company expands by keeping intact its separate corporate 
identity. In this situation, a company (i.e. holding company) gains control over the 
other company (subsidiary company). This control is exercised by one company 
over the other by-  
1.  Purchasing specified number of shares i.e. ownership through voting power 
of that company or  
2.  Exercising control over the board of directors.  
The companies connected in these ways are collectively called as a Group of 
Companies. 
Holding Company and Subsidiary Company have also been defined in Section 2 
of the Companies Act, 2013. 
Holding company 
As per 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. 
It may be defined as one, which has one or more subsidiary companies and 
enjoys control over them. Legally a holding company and its subsidiaries are 
distinct and separate entities. However, in substance holding and subsidiary 
companies work as a group. Accordingly, users of holding company’s accounts 
need financial information of subsidiaries also to understand the performance 
and financial position of the group (i.e. holding company and subsidiaries on a 
consolidated basis). 
Subsidiary Company 
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a 
company in which the holding company - 
(i)  controls the composition of the Board of Directors; or 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING 
 
 10.4 
(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:  
A company shall be deemed to be a subsidiary company of the holding company 
even if there is indirect control through the subsidiary company (ies). 
The control over the composition of a subsidiary company’s Board of Directors 
means exercise of power to appoint or remove all or a majority of the directors of 
the subsidiary company. 
Section 19 of the Companies Act, 2013 prohibits a subsidiary company from 
holding shares in the holding company.  According to this section, no company 
shall, either by itself or through its nominees, hold any shares in its holding 
company and no holding company shall allot or transfer its shares to any of its 
subsidiary companies and any such allotment or transfer of shares of a company 
to its subsidiary company shall be void. 
However, a subsidiary may continue to be a member of its holding company 
when  
(a)  the subsidiary company holds such shares as the legal representative of a 
deceased member of the holding company; or 
(b)  the subsidiary company holds such shares as a trustee; or 
(c)  the subsidiary company is a shareholder even before it became a subsidiary 
company of the holding company.   
The subsidiary company shall have a right to vote at a meeting of the holding 
company only in respect of the shares held by it as a legal representative or as a 
trustee, as mentioned above in point (a) and (b). 
Applicable Accounting Standard 
Accounting Standard (AS) 21: Consolidated Financial Statements provides 
guidance on preparation of Consolidated Financial Statements, the purpose of 
which is discussed in Para 3 below.  
This Standard came into effect in respect of accounting periods commenced on 
or after 1-4-2001.  AS 21 lays down principles and procedures for preparation and 
presentation of consolidated financial statements. Consolidated financial 
statements are presented by the parent (holding company) to provide financial 
© The Institute of Chartered Accountants of India
 
 
ACCOUNTING STANDARD FOR CONSOLIDATED 
FINANCIAL STATEMENTS  
 
    
 
10.5 
 
information about the economic activities of the group as a single economic 
entity.  The parent presenting consolidated financial statements should present 
such statements in accordance with this standard but in its separate financial 
statements, investments in subsidiaries would be accounted as per AS 13. 
 1.2 OBJECTIVES OF AS 21 
The objective of this Standard is to lay down principles and procedures for 
preparation and presentation of consolidated financial statements. Consolidated 
Financial Statements are prepared by the holding/parent company to provide 
financial information regarding the economic resources controlled by its group 
and results achieved with these resources. These consolidated financial 
statements are prepared by the parent company in addition to the financial 
statement prepared by the parent company for only its own affairs. Hence parent 
company prepares two financial statements, one for only its own affairs and one 
for taking the whole group as one unit in the form of consolidated financial 
statements. Consolidated financial statements usually comprise the following: 
? Consolidated Balance Sheet 
? Consolidated Profit & Loss Statement 
? Notes to Accounts, other statements and explanatory material 
? Consolidated Cash Flow Statement, if parent company presents its own cash 
flow statement. 
While preparing the consolidated financial statement, all other ASs and 
Accounting Policies will be applicable as they are applied in parent company’s 
own financial statements. 
A parent which presents consolidated financial statements should consolidate all 
subsidiaries, domestic as well as foreign. Where an enterprise does not have a 
subsidiary but has an associate and/or a joint venture such an enterprise should 
also prepare consolidated financial statements in accordance with Accounting 
Standard (AS) 23, Accounting for Associates in Consolidated Financial Statements, 
and Accounting Standard (AS) 27, Financial Reporting of Interests in Joint 
Ventures respectively.  
© The Institute of Chartered Accountants of India