Consolidated Balance Sheet - Holding Companies, Advanced Corporate Accounting | Advanced Corporate Accounting - B Com PDF Download

Introduction

A company may purchase either the whole or the majority of shares of another company so as to have controlling interest in such a company or companies. The controlling company is known as the holding company and the company so controlled is known as subsidiary company. Holding company has the power to nominate the majority of the directors of subsidiary company. Consolidated balance sheet is a single balance sheet of holding and subsidiary companies. In India, it is not compulsory on the part of the holding company to prepare the consolidated balance sheet. But in England, it is a must on the part of the holding company to prepare the consolidated balance sheet in addition to its normal balance sheet.

This paper explains the important adjustments made while preparing the consolidated balance sheet. In this paper H Ltd refers to holding company and S Ltd refers to subsidiary company.

'H' LTD'S Investment in Shares of  'S' LTD.

The share of S Ltd is held by H Ltd as investments. This represents the ownership of H Ltd in the equity or net assets of S Ltd. If the entire shares of S Ltd are held by H Ltd, the investment of H Ltd in the share of S Ltd is replaced by the capital of S Ltd, while preparing the consolidated balance sheet.

Minority Interest 

When the outsiders hold some of the shares of S Ltd, their proportionate share in the assets and liabilities of S Ltd is known as minority interest. The majority interest is calculated by using the following equation:

If  preference shares of S Ltd are held by outsiders, the face value of such shares with dividend due there on will be included in the minority interest. Minority interest is shown as a liability in the consolidated balance sheet.

Capital Profits / Losses 

These are otherwise known as pre-acquisition profits or losses. These are reverses/P&L (Cr) or (Dr) balance on the date of purchase of shares of S ltd by H ltd. These profits/losses are to be divided among H Ltd and outsiders on the basis of their shareholding proportions. H Ltd' share of capital profits/losses is adjusted on the calculation of cost of control(good will)/capital reserve. The outsiders' share of capital profits/losses is adjusted on minority interest.

Reveneu Profits / Losses 

These are otherwise known as post-acquisition profits/losses. These profits/losses are earned By S Ltd after the acquisition shares by H Ltd. These profits/losses are to divided among h Ltd and outsiders on th ebasis of their shareholding proportions. H Ltd' share of revenue profits/losses is added/deducted from its P&l account in the consolidated balance sheet. The outsiders' share of revenue profits/losses is adjusted on minority interest.

Cost of Control (Goodwill)/Capital Reserve 

If H Ltd purchases the shares of S Ltd at a higher price than their actual value, the excess payment is known as cost of control or good will (Loss on purchase of shares of S Ltd). On the other hand, if the shares are purchased at a lower price than their actual value, the extent of lower payment is known as capital reserve (profit on purchase of shares of S Ltd). The cost of control/capital reserve is calculated as follows:
 

*If it is positive, the amount will be treated as cost of control and if it is negative, the amount will be treated as capital reserve. The amount of cost of control is shown in the asset side of the consolidated balance sheet and the capital reserve is shown in the liability of the consolidated balance sheet.

Inter - Company Balances (Mutual Owings) 

In preparing the consolidated balance sheet mutual Owings between H Ltd and S Ltd are to be eliminated. Such transactions are:
 1. Goods sold on credit by H Ltd to S Ltd and vice versa.
 2. Bills drawn by H Ltd accepted by S Ltd and vice versa.
 3. Loans advanced by H Ltd to S Ltd and vice versa.
 4. Debentures issued by H Ltd and held by S Ltd and vice versa.

The effects of the above transactions are involved in the consolidated balance sheet is shown below:                                

Consolidated Balanced Sheet
 

Unrealised profit on Stock Reserve

If intercompany transfer of stock takes place at a profit, there may be an unrealized profit on stock unsold at the close of financial year. The unrealized profits on stock should be deducted from stock on the asset side of the consolidated balance sheet. In the liability side, the amount of stock reserve should be deducted from the P& L account. For example, if H Ltd purchased from S Ltd goods worth Rs. 40,000 on which S Ltd had charged a profit of 25 percent on cost and goods worth Rs.25,000 remained unsold at the end of the financial year. The unrealized profit on stock is (25/125% of 25,000) 5,000. The effect of this transaction on the consolidated balance sheet is shown below:

Consolidated Balanced Sheet
 

Revaluation of Assets and Liabilities 

If assets and liabilities of S Ltd are revalued at the time of acquisition of shares, there will be revaluation profits/losses. The revaluation profits/losses are treated as capital profits/losses. Profits at the end of the year will be charged with depreciation on the revised values in case the value of fixed assets appreciates and excess depreciation will be credited back to the profit, in case the value of assets depreciates. H Ltd' share of revaluation profits/losses is adjusted in the calculation of Good will/Capital reserve. S Ltd' share of revaluation profits/losses is adjusted in the calculation of minority interest.

Issue of Bonus Shares by Ltd. 

S Ltd issues bonus shares either out to capital profits or revenue profits. If bonus shares are issued out of capital profits, there will be no effect on consolidated balance sheet. This is because H Ltd' share of capital profits is reduced on account of issue of bonus shares and on the other hand, paid up value of shares are held by H Ltd and outsiders increases. There will be no change in the values of the cost of control/capital reserve or minority interest.

Bonus shares issued out of revenue profits will have effect on the consolidated balance sheet. The value of shares held by H Ltd and outsiders will increase. The increased paid up value of shares of H Ltd will reduce the cost of control or increase the capital reserve. But there will be no change in the minority interest.

Treatment of Dividend 

S Ltd may declare dividend from either capital profits or revenue profits. The effect of dividend declared out of capital profits on the consolidated balance sheet is shown below:

Consolidated Balanced Sheet
 

* This amount will be the amount paid for the purchase of shares for  calculating the cost of control/capital reserve.

If dividend is declared out of revenue profits, the effect on the consolidated balance sheet is shown below:

Consolidated Balanced Sheet
 

Note: Outsiders' share of dividend will not affect the consolidated balance sheet. The outsiders receive the dividend in cash and use the dividend amount as they like.