Accounts of Holding Companies | Advanced Corporate Accounting - B Com PDF Download

 Page 1


 
 
								ACCOUNTS OF HOLDING COMPANIES –
 
I
 
 
 
 
  
  
  
   
   
  
  
  
  
   
   
 
 
   
  
  
  
  
 
  
 
 
 
   
  
  
  
   
  
 
 
 
 INTRODUCTION 
 
When the company acquires the majority of shares in the ownership capital or is in a position 
to influence or control the management of the other company, the company is called the 
holding company and the other company is called subsidiary company. The subsidiary 
companies have their independent existence and managed by separate governing boards.  
As per section 4 of the Companies Act, 2013- A company shall be deemed to be the 
subsidiary company of the other if:  
i) The holding company controls the composition of the Board of Directors of the 
subsidiary company; 
ii) The holding company controls more than half of the total voting power of such 
company; and 
Page 2


 
 
								ACCOUNTS OF HOLDING COMPANIES –
 
I
 
 
 
 
  
  
  
   
   
  
  
  
  
   
   
 
 
   
  
  
  
  
 
  
 
 
 
   
  
  
  
   
  
 
 
 
 INTRODUCTION 
 
When the company acquires the majority of shares in the ownership capital or is in a position 
to influence or control the management of the other company, the company is called the 
holding company and the other company is called subsidiary company. The subsidiary 
companies have their independent existence and managed by separate governing boards.  
As per section 4 of the Companies Act, 2013- A company shall be deemed to be the 
subsidiary company of the other if:  
i) The holding company controls the composition of the Board of Directors of the 
subsidiary company; 
ii) The holding company controls more than half of the total voting power of such 
company; and 
 
 
iii) The holding company hold more than half of nominal value of its equity share 
capital 
This unit will enable you to know basic concept of Holding Company and Subsidiary 
Company, objectives of holding company, various types of Holding Company as well as the 
advantages and its limitation of Holding Company. This unit will also enable the learners in 
terms of preparation of final accounts of Holding Companies without adjustments covering 
the determination of amount of Goodwill/Capital Reserve and determination of amount of 
minority interest as well.  
 
 
 CONCEPT  
 
The term holding company refers to that concept where it owns outstanding stock of other 
companies (Subsidiary Company).  The parent company (Holding Company) does not 
produce any kind of goods or services or conduct any other business operation. Rather, 
Holding company holds the controlling stock in other company. The prime objective of 
holding company is to own shares of other companies in order to influence the control the 
management of the other company. 
 
 Holding Company 
 
As per 2(46) of the Companies Act, 2013 defines holding company as: 
A company which has one or more subsidiary company having full control over them. It is 
formed for the purpose of purchases and owning share in other company. Holding company 
offers several benefits such as gaining more control, retaining the management of the 
subsidiary firm and incurring lower tax liabilities. 
 
 Subsidiary Company 
 
Section 2(87) of the Companies act, 2013 defines “Subsidiary Company” as an enterprise that 
is controlled by another enterprise (known as holding company). Subsidiary companies are of 
two types: 
i) Wholly owned: This is the company in which 100% of the shares and the voting 
rights are owned by holding company 
ii) Partly owned: This is the company in which more than 50 % but less than 100% 
shares and voting rights are owned by holding company. In this type of subsidiary, 
some of the shareholders of the subsidiary do not sell their shares to the holding 
company and these shareholders are known as minority shareholders. The interest 
of the monitory shareholders in the assets of the subsidiary is called the minority 
interest.    
 
 OBJECTIVESS OF HOLDING COMPANIES 
 
There are many objectives of holding companies. Let us discuss some of them which are as 
follow: 
1. To eliminate of competition 
2. To enjoy the economies of large scale of production 
3. To achieve an assured market for the product of the company 
4. To ensure a smooth supply of raw materials 
Page 3


 
 
								ACCOUNTS OF HOLDING COMPANIES –
 
I
 
 
 
 
  
  
  
   
   
  
  
  
  
   
   
 
 
   
  
  
  
  
 
  
 
 
 
   
  
  
  
   
  
 
 
 
 INTRODUCTION 
 
When the company acquires the majority of shares in the ownership capital or is in a position 
to influence or control the management of the other company, the company is called the 
holding company and the other company is called subsidiary company. The subsidiary 
companies have their independent existence and managed by separate governing boards.  
As per section 4 of the Companies Act, 2013- A company shall be deemed to be the 
subsidiary company of the other if:  
i) The holding company controls the composition of the Board of Directors of the 
subsidiary company; 
ii) The holding company controls more than half of the total voting power of such 
company; and 
 
 
iii) The holding company hold more than half of nominal value of its equity share 
capital 
This unit will enable you to know basic concept of Holding Company and Subsidiary 
Company, objectives of holding company, various types of Holding Company as well as the 
advantages and its limitation of Holding Company. This unit will also enable the learners in 
terms of preparation of final accounts of Holding Companies without adjustments covering 
the determination of amount of Goodwill/Capital Reserve and determination of amount of 
minority interest as well.  
 
 
 CONCEPT  
 
The term holding company refers to that concept where it owns outstanding stock of other 
companies (Subsidiary Company).  The parent company (Holding Company) does not 
produce any kind of goods or services or conduct any other business operation. Rather, 
Holding company holds the controlling stock in other company. The prime objective of 
holding company is to own shares of other companies in order to influence the control the 
management of the other company. 
 
 Holding Company 
 
As per 2(46) of the Companies Act, 2013 defines holding company as: 
A company which has one or more subsidiary company having full control over them. It is 
formed for the purpose of purchases and owning share in other company. Holding company 
offers several benefits such as gaining more control, retaining the management of the 
subsidiary firm and incurring lower tax liabilities. 
 
 Subsidiary Company 
 
Section 2(87) of the Companies act, 2013 defines “Subsidiary Company” as an enterprise that 
is controlled by another enterprise (known as holding company). Subsidiary companies are of 
two types: 
i) Wholly owned: This is the company in which 100% of the shares and the voting 
rights are owned by holding company 
ii) Partly owned: This is the company in which more than 50 % but less than 100% 
shares and voting rights are owned by holding company. In this type of subsidiary, 
some of the shareholders of the subsidiary do not sell their shares to the holding 
company and these shareholders are known as minority shareholders. The interest 
of the monitory shareholders in the assets of the subsidiary is called the minority 
interest.    
 
 OBJECTIVESS OF HOLDING COMPANIES 
 
There are many objectives of holding companies. Let us discuss some of them which are as 
follow: 
1. To eliminate of competition 
2. To enjoy the economies of large scale of production 
3. To achieve an assured market for the product of the company 
4. To ensure a smooth supply of raw materials 
 
 
 
 
  
 
  
  
  
  
 
 
 
 
 
TYPES OF HOLDING COMPANY
 
 
1
 
Pure:
 
This refers to those companies which
 
do not participate in another business
 
other 
than controlling one or more firms. It is formed for the purpose of owning stocks in 
other companies.
 
2
 
Mixed
 
Holding Companies:
  
Refers to those companies which
 
do not only control 
other companies but also engages
 
in its own operations.  
 
3
 
Immediate: refers to that company which retains voting power or control of another 
company, inspite of the fact that the company itself is already controlled by another 
entity. It is a company that is already a subsidiary of another.
 
4.
 
Intermediate:
  
It is a firm that is both a holding company of another entity and a 
subsidiary of a large corporation. This type of firm might be exempted from publishing 
financial records as a holding company of the smaller group.
 
 
 
 
ADVANTAGES OF HOLDING COMPANIES
 
Holding company
 
offers several advantages. Let us discuss those advantages in 
detail.
 
(1)
 
Better quality Decisions:
 
The holding companies allow the better quality 
decisions at all levels of the company. The holding company concentrates on the 
corporate policies and strategies and the operating levels in the implementation.
 
(2)
 
Better Utilization of Resources:
 
Holding companies facilitate the better 
utilization of the financial and the other resources of the companies. The holding 
company pools the resources of group of enterprises.
 
(3)
 
Easy method of Acquiring Control:
 
Through this method organizations have to 
spend less in acquiring the control of the other company.
 
(4)
 
Reduces Competition:
 
Competition among the two companies is totally 
eliminated as both of the companies are managed by the same group. 
 
(5)
 
Easy Rid from Subsidiary: If the company wants to get rid of the subsidiary; it 
can easily do so by selling the shares of the subsidiary in the open market.
 
(6)
 
Income tax benefits:
 
Separate identities are maintained by both the companies so 
that they can avail the tax benefits by carrying forward their losses of the previous 
years.
 
Page 4


 
 
								ACCOUNTS OF HOLDING COMPANIES –
 
I
 
 
 
 
  
  
  
   
   
  
  
  
  
   
   
 
 
   
  
  
  
  
 
  
 
 
 
   
  
  
  
   
  
 
 
 
 INTRODUCTION 
 
When the company acquires the majority of shares in the ownership capital or is in a position 
to influence or control the management of the other company, the company is called the 
holding company and the other company is called subsidiary company. The subsidiary 
companies have their independent existence and managed by separate governing boards.  
As per section 4 of the Companies Act, 2013- A company shall be deemed to be the 
subsidiary company of the other if:  
i) The holding company controls the composition of the Board of Directors of the 
subsidiary company; 
ii) The holding company controls more than half of the total voting power of such 
company; and 
 
 
iii) The holding company hold more than half of nominal value of its equity share 
capital 
This unit will enable you to know basic concept of Holding Company and Subsidiary 
Company, objectives of holding company, various types of Holding Company as well as the 
advantages and its limitation of Holding Company. This unit will also enable the learners in 
terms of preparation of final accounts of Holding Companies without adjustments covering 
the determination of amount of Goodwill/Capital Reserve and determination of amount of 
minority interest as well.  
 
 
 CONCEPT  
 
The term holding company refers to that concept where it owns outstanding stock of other 
companies (Subsidiary Company).  The parent company (Holding Company) does not 
produce any kind of goods or services or conduct any other business operation. Rather, 
Holding company holds the controlling stock in other company. The prime objective of 
holding company is to own shares of other companies in order to influence the control the 
management of the other company. 
 
 Holding Company 
 
As per 2(46) of the Companies Act, 2013 defines holding company as: 
A company which has one or more subsidiary company having full control over them. It is 
formed for the purpose of purchases and owning share in other company. Holding company 
offers several benefits such as gaining more control, retaining the management of the 
subsidiary firm and incurring lower tax liabilities. 
 
 Subsidiary Company 
 
Section 2(87) of the Companies act, 2013 defines “Subsidiary Company” as an enterprise that 
is controlled by another enterprise (known as holding company). Subsidiary companies are of 
two types: 
i) Wholly owned: This is the company in which 100% of the shares and the voting 
rights are owned by holding company 
ii) Partly owned: This is the company in which more than 50 % but less than 100% 
shares and voting rights are owned by holding company. In this type of subsidiary, 
some of the shareholders of the subsidiary do not sell their shares to the holding 
company and these shareholders are known as minority shareholders. The interest 
of the monitory shareholders in the assets of the subsidiary is called the minority 
interest.    
 
 OBJECTIVESS OF HOLDING COMPANIES 
 
There are many objectives of holding companies. Let us discuss some of them which are as 
follow: 
1. To eliminate of competition 
2. To enjoy the economies of large scale of production 
3. To achieve an assured market for the product of the company 
4. To ensure a smooth supply of raw materials 
 
 
 
 
  
 
  
  
  
  
 
 
 
 
 
TYPES OF HOLDING COMPANY
 
 
1
 
Pure:
 
This refers to those companies which
 
do not participate in another business
 
other 
than controlling one or more firms. It is formed for the purpose of owning stocks in 
other companies.
 
2
 
Mixed
 
Holding Companies:
  
Refers to those companies which
 
do not only control 
other companies but also engages
 
in its own operations.  
 
3
 
Immediate: refers to that company which retains voting power or control of another 
company, inspite of the fact that the company itself is already controlled by another 
entity. It is a company that is already a subsidiary of another.
 
4.
 
Intermediate:
  
It is a firm that is both a holding company of another entity and a 
subsidiary of a large corporation. This type of firm might be exempted from publishing 
financial records as a holding company of the smaller group.
 
 
 
 
ADVANTAGES OF HOLDING COMPANIES
 
Holding company
 
offers several advantages. Let us discuss those advantages in 
detail.
 
(1)
 
Better quality Decisions:
 
The holding companies allow the better quality 
decisions at all levels of the company. The holding company concentrates on the 
corporate policies and strategies and the operating levels in the implementation.
 
(2)
 
Better Utilization of Resources:
 
Holding companies facilitate the better 
utilization of the financial and the other resources of the companies. The holding 
company pools the resources of group of enterprises.
 
(3)
 
Easy method of Acquiring Control:
 
Through this method organizations have to 
spend less in acquiring the control of the other company.
 
(4)
 
Reduces Competition:
 
Competition among the two companies is totally 
eliminated as both of the companies are managed by the same group. 
 
(5)
 
Easy Rid from Subsidiary: If the company wants to get rid of the subsidiary; it 
can easily do so by selling the shares of the subsidiary in the open market.
 
(6)
 
Income tax benefits:
 
Separate identities are maintained by both the companies so 
that they can avail the tax benefits by carrying forward their losses of the previous 
years.
 
 
 
(7) Efficient Management: It becomes easier to manage both the companies as both 
the companies maintain their separate identities. This increases the efficiency of 
the management.  
(8) Enhances Corporate Planning: The holding company is able to concentrate to 
corporate planning, acquisition, and update technology and building of corporate 
culture on sound business principles. 
(9) Managerial and Commercial Culture: The management of the holding 
company promotes the commercial and managerial culture instead of bureaucratic 
culture. 
 
 
 LIMITATIONS OF HOLDING COMPANY  
 
Holding company suffers from several disadvantages. Let us discuss those 
disadvantages in detail. 
 
(1) Secret Reserves: To the detriment of the minority interest, the unscrupulous 
directors can easily create secret reserves. 
(2) Difficulty in Ascertaining Financial Position: The creditors in the subsidiary 
company and the shareholders in the holding company may not be aware of the 
true financial position of the company. 
(3) Mismanagement: When in the holding company number of constituents is more 
and there is not equivalent management efficiency, it results in the 
mismanagement of the operations of the company. 
(4) Fraud in Inter-Company Transactions: There are more chances of fraud due to 
the inter-company transactions. This is due to the reason that inter-company 
transactions are settled at very high or very low price according to the requirement 
of the holding company.  
(5) Forced Appointment of the Directors: The subsidiary company is sometimes 
forced by the holding company to appoint some directors or the officers in the 
company. 
(6) Difficulty in Valuation of Stock: It becomes difficult to value the stock as the 
stock of the company consists of huge quantity of inter-company goods. 
(7) Oppression of Minority Shareholders: There is always the fear of oppression of 
minority shareholders as the financial and other resources are totally managed in a 
way that suits the interest of the holding company. 
 
 
 
  
 
 
  
Page 5


 
 
								ACCOUNTS OF HOLDING COMPANIES –
 
I
 
 
 
 
  
  
  
   
   
  
  
  
  
   
   
 
 
   
  
  
  
  
 
  
 
 
 
   
  
  
  
   
  
 
 
 
 INTRODUCTION 
 
When the company acquires the majority of shares in the ownership capital or is in a position 
to influence or control the management of the other company, the company is called the 
holding company and the other company is called subsidiary company. The subsidiary 
companies have their independent existence and managed by separate governing boards.  
As per section 4 of the Companies Act, 2013- A company shall be deemed to be the 
subsidiary company of the other if:  
i) The holding company controls the composition of the Board of Directors of the 
subsidiary company; 
ii) The holding company controls more than half of the total voting power of such 
company; and 
 
 
iii) The holding company hold more than half of nominal value of its equity share 
capital 
This unit will enable you to know basic concept of Holding Company and Subsidiary 
Company, objectives of holding company, various types of Holding Company as well as the 
advantages and its limitation of Holding Company. This unit will also enable the learners in 
terms of preparation of final accounts of Holding Companies without adjustments covering 
the determination of amount of Goodwill/Capital Reserve and determination of amount of 
minority interest as well.  
 
 
 CONCEPT  
 
The term holding company refers to that concept where it owns outstanding stock of other 
companies (Subsidiary Company).  The parent company (Holding Company) does not 
produce any kind of goods or services or conduct any other business operation. Rather, 
Holding company holds the controlling stock in other company. The prime objective of 
holding company is to own shares of other companies in order to influence the control the 
management of the other company. 
 
 Holding Company 
 
As per 2(46) of the Companies Act, 2013 defines holding company as: 
A company which has one or more subsidiary company having full control over them. It is 
formed for the purpose of purchases and owning share in other company. Holding company 
offers several benefits such as gaining more control, retaining the management of the 
subsidiary firm and incurring lower tax liabilities. 
 
 Subsidiary Company 
 
Section 2(87) of the Companies act, 2013 defines “Subsidiary Company” as an enterprise that 
is controlled by another enterprise (known as holding company). Subsidiary companies are of 
two types: 
i) Wholly owned: This is the company in which 100% of the shares and the voting 
rights are owned by holding company 
ii) Partly owned: This is the company in which more than 50 % but less than 100% 
shares and voting rights are owned by holding company. In this type of subsidiary, 
some of the shareholders of the subsidiary do not sell their shares to the holding 
company and these shareholders are known as minority shareholders. The interest 
of the monitory shareholders in the assets of the subsidiary is called the minority 
interest.    
 
 OBJECTIVESS OF HOLDING COMPANIES 
 
There are many objectives of holding companies. Let us discuss some of them which are as 
follow: 
1. To eliminate of competition 
2. To enjoy the economies of large scale of production 
3. To achieve an assured market for the product of the company 
4. To ensure a smooth supply of raw materials 
 
 
 
 
  
 
  
  
  
  
 
 
 
 
 
TYPES OF HOLDING COMPANY
 
 
1
 
Pure:
 
This refers to those companies which
 
do not participate in another business
 
other 
than controlling one or more firms. It is formed for the purpose of owning stocks in 
other companies.
 
2
 
Mixed
 
Holding Companies:
  
Refers to those companies which
 
do not only control 
other companies but also engages
 
in its own operations.  
 
3
 
Immediate: refers to that company which retains voting power or control of another 
company, inspite of the fact that the company itself is already controlled by another 
entity. It is a company that is already a subsidiary of another.
 
4.
 
Intermediate:
  
It is a firm that is both a holding company of another entity and a 
subsidiary of a large corporation. This type of firm might be exempted from publishing 
financial records as a holding company of the smaller group.
 
 
 
 
ADVANTAGES OF HOLDING COMPANIES
 
Holding company
 
offers several advantages. Let us discuss those advantages in 
detail.
 
(1)
 
Better quality Decisions:
 
The holding companies allow the better quality 
decisions at all levels of the company. The holding company concentrates on the 
corporate policies and strategies and the operating levels in the implementation.
 
(2)
 
Better Utilization of Resources:
 
Holding companies facilitate the better 
utilization of the financial and the other resources of the companies. The holding 
company pools the resources of group of enterprises.
 
(3)
 
Easy method of Acquiring Control:
 
Through this method organizations have to 
spend less in acquiring the control of the other company.
 
(4)
 
Reduces Competition:
 
Competition among the two companies is totally 
eliminated as both of the companies are managed by the same group. 
 
(5)
 
Easy Rid from Subsidiary: If the company wants to get rid of the subsidiary; it 
can easily do so by selling the shares of the subsidiary in the open market.
 
(6)
 
Income tax benefits:
 
Separate identities are maintained by both the companies so 
that they can avail the tax benefits by carrying forward their losses of the previous 
years.
 
 
 
(7) Efficient Management: It becomes easier to manage both the companies as both 
the companies maintain their separate identities. This increases the efficiency of 
the management.  
(8) Enhances Corporate Planning: The holding company is able to concentrate to 
corporate planning, acquisition, and update technology and building of corporate 
culture on sound business principles. 
(9) Managerial and Commercial Culture: The management of the holding 
company promotes the commercial and managerial culture instead of bureaucratic 
culture. 
 
 
 LIMITATIONS OF HOLDING COMPANY  
 
Holding company suffers from several disadvantages. Let us discuss those 
disadvantages in detail. 
 
(1) Secret Reserves: To the detriment of the minority interest, the unscrupulous 
directors can easily create secret reserves. 
(2) Difficulty in Ascertaining Financial Position: The creditors in the subsidiary 
company and the shareholders in the holding company may not be aware of the 
true financial position of the company. 
(3) Mismanagement: When in the holding company number of constituents is more 
and there is not equivalent management efficiency, it results in the 
mismanagement of the operations of the company. 
(4) Fraud in Inter-Company Transactions: There are more chances of fraud due to 
the inter-company transactions. This is due to the reason that inter-company 
transactions are settled at very high or very low price according to the requirement 
of the holding company.  
(5) Forced Appointment of the Directors: The subsidiary company is sometimes 
forced by the holding company to appoint some directors or the officers in the 
company. 
(6) Difficulty in Valuation of Stock: It becomes difficult to value the stock as the 
stock of the company consists of huge quantity of inter-company goods. 
(7) Oppression of Minority Shareholders: There is always the fear of oppression of 
minority shareholders as the financial and other resources are totally managed in a 
way that suits the interest of the holding company. 
 
 
 
  
 
 
  
 
 
 
 
  
 
 
   
  
   
 
  
 
 
 
 
 
 
 PREPARTION OF FINAL ACCOUNTS OF HOLDING COMPANY 
WITHOUT ADJUSTMENTS 
 
The main purpose of Final Account preparation is intended to present financial information 
about a parent and its subsidiary (ies) into a single economic entity to show the economic 
affairs controlled by the group.  
 
 Components/Format of Consolidated Financial Statement 
It is not a legal requirement to prepare the consolidated balance sheet under the 
Companies Act, 2013 and there is no prescribed format for that. It should be however 
prepare according to the schedule (iii) of the Companies Act, 2013 
Consolidated Balance Sheet of Holding Co. and the Subsidiary Company 
Liabilities Amount 
(Rs.) 
Assets Amount 
(Rs.) 
Share Capital (of Holding 
Company) 
Minority Interest 
Reserve and Surplus: 
Capital Reserve 
Add Capital Reserve from 
acquisition 
Less: Goodwill (if any) 
Revenue Reserve base: (of 
holding Company) 
Profit of holding Company: 
Add: Share in Post profits 
Less: Unrealized Profits 
Secured Loans: (of all 
companies) 
……… 
………. 
 
 
 
 
 
………. 
 
 
 
 
 
………. 
………. 
Fixed Assets: 
Cost of Control (Goodwill) 
Less: Capital Reserve 
Other Fixed Assets 
Investments: 
Investments of all Companies 
Current Assets, Loans and 
Advances of All Companies 
Less: Mutual Owings 
Less: Unrealised Profits 
Miscellaneous Expenditure  
(Profit and Loss Account Dr. 
Balance) 
 
 
…….. 
 
 
…........ 
 
 
………. 
……….