Consolidated Financial Statements: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
 
 
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.  
CHAPTER 
10 
Page 2


 
LEARNING OUTCOMES 
 
 
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.  
CHAPTER 
10 
  
 
10.2 ADVANCED ACCOUNTING 
 
 
 
 
NOTE: As per the syllabus, the chapter covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of interest in subsidiary at different dates; different reporting dates 
of holding and subsidiary; disposal of a subsidiary and foreign subsidiaries.  
 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
 
 
Page 3


 
LEARNING OUTCOMES 
 
 
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.  
CHAPTER 
10 
  
 
10.2 ADVANCED ACCOUNTING 
 
 
 
 
NOTE: As per the syllabus, the chapter covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of interest in subsidiary at different dates; different reporting dates 
of holding and subsidiary; disposal of a subsidiary and foreign subsidiaries.  
 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
 
 
 
 
10.3 
 
CONSOLIDATED FINANCIAL STATEMENTS  
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 times, 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 combined 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 
(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:  
Page 4


 
LEARNING OUTCOMES 
 
 
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.  
CHAPTER 
10 
  
 
10.2 ADVANCED ACCOUNTING 
 
 
 
 
NOTE: As per the syllabus, the chapter covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of interest in subsidiary at different dates; different reporting dates 
of holding and subsidiary; disposal of a subsidiary and foreign subsidiaries.  
 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
 
 
 
 
10.3 
 
CONSOLIDATED FINANCIAL STATEMENTS  
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 times, 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 combined 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 
(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:  
  
 
10.4 ADVANCED ACCOUNTING 
 
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. 
Total share capital, as mentioned in section 2(87) (ii) above, has been further 
clarified by the Rule 2(1)(r) of the Companies (Specification of Definitions Details) 
Rules, 2016.  As per the Rule, total share capital includes  
(a) paid up equity share capital; and 
(b) convertible preference share capital. 
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). 
Definitions as per Accounting Standard (AS) 21 
Control: 
(a)  the ownership, directly or indirectly through subsidiary(ies), of more than 
one-half of the voting power of an enterprise; or 
(b)  control of the composition of the board of directors in the case of a company 
or of the composition of the corresponding governing body in case of any 
other enterprise so as to obtain economic benefits from its activities. 
Page 5


 
LEARNING OUTCOMES 
 
 
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.  
CHAPTER 
10 
  
 
10.2 ADVANCED ACCOUNTING 
 
 
 
 
NOTE: As per the syllabus, the chapter covers simple problems on consolidated 
financial statements with single subsidiary and excludes problems involving 
acquisition of interest in subsidiary at different dates; different reporting dates 
of holding and subsidiary; disposal of a subsidiary and foreign subsidiaries.  
 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
 
 
 
 
10.3 
 
CONSOLIDATED FINANCIAL STATEMENTS  
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 times, 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 combined 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 
(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:  
  
 
10.4 ADVANCED ACCOUNTING 
 
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. 
Total share capital, as mentioned in section 2(87) (ii) above, has been further 
clarified by the Rule 2(1)(r) of the Companies (Specification of Definitions Details) 
Rules, 2016.  As per the Rule, total share capital includes  
(a) paid up equity share capital; and 
(b) convertible preference share capital. 
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). 
Definitions as per Accounting Standard (AS) 21 
Control: 
(a)  the ownership, directly or indirectly through subsidiary(ies), of more than 
one-half of the voting power of an enterprise; or 
(b)  control of the composition of the board of directors in the case of a company 
or of the composition of the corresponding governing body in case of any 
other enterprise so as to obtain economic benefits from its activities. 
 
 
10.5 
 
CONSOLIDATED FINANCIAL STATEMENTS  
Subsidiary is an enterprise that is controlled by another enterprise (known as the 
parent). 
Minority interest is that part of the net results of operations and of the net assets 
of a subsidiary attributable to interests which are not owned, directly or indirectly 
through subsidiary(ies), by the parent. 
 2. WHOLLY OWNED AND PARTLY OWNED 
SUBSIDIARIES 
S. 
No. 
Wholly owned subsidiary 
company 
Partly owned subsidiary company 
1. A wholly owned subsidiary 
company is one in which all the 
shares are owned by the holding 
company. 
In a partly owned subsidiary, all the 
shares of subsidiary company are not 
acquired by the holding company i.e. 
only the majority of shares (i.e., more 
than 50%) are owned by the holding 
company. 
2. 100% voting rights are vested by 
the holding company. 
Voting rights of more than 50% but 
less than 100% are vested by the 
holding company. 
3. There is no minority interest 
because all the shares with voting 
rights are held by the holding 
company.   
There is a minority interest because 
less than 50% shares with voting 
rights are held by outsiders other 
than the holding company. 
 3. PURPOSE OF PREPARING THE 
CONSOLIDATED FINANCIAL STATEMENTS 
Consolidated financial statements (CFS) are the financial statements of a ‘group’ 
presented as those of a single enterprise, where a ‘group’ refers to a parent and all 
its subsidiaries. Parent company needs to inform the users about the financial 
position and results of operations of not only of their enterprise itself but also of 
the group as a whole.  For this purpose, consolidated financial statements are 
prepared and presented by a parent/holding enterprise to provide financial 
information about a parent and its subsidiary(ies) as a single economic entity.